Passive income means money that we haven’t earned by working. And getting it is a good idea for most people. Getting it for life is even better.
Choosing an asset class
One common route to achieving passive income streams is via investing in assets. But which assets? My choice is stocks and shares.
I could invest in property, which has done well for investors over many years. But my feeling is that property prices are too high right now. Although I may be proved wrong about that over the coming years.
And I’m reluctant to keep too much money in cash savings because interest rates on bank accounts usually remain below the rate of general price inflation. However, it’s important to keep some cash on hand for my immediate needs.
Other alternatives include so-called safe-haven assets such as gold or Bitcoin. And they’ve both risen a lot in value and could continue to increase. But they can’t work hard for me by increasing their value internally as businesses can. So that steers me back to stocks and shares.
Careful stock choice
Shares overall have a good long-term track record. And they’ve outperformed all other major asset classes over the long haul. So, I’d invest my £20 a week in dividend-paying stocks held within a Stocks and Shares ISA.
It’s important to choose shares carefully, though. And I favour those with businesses operating in defensive sectors rather than some of the more cyclical enterprises around. For example, I like the look of healthcare giant GlaxoSmithKline right now. And I’m also keen on smoking products maker British American Tobacco and energy business SSE.
While in the building stage of my portfolio, I’d reinvest all the dividends along the way to help compound the value of my investments. Then later when I’m ready to draw passive income, I’d take the dividends.
However, all shares come with risks as well as opportunities. And it’s possible for some companies to cut their shareholder dividends in the future. Nevertheless, if I choose stocks with care, many will likely be capable of providing me with passive income for life. However, with geopolitical uncertainty affecting the markets, it may not feel like a good time to buy stocks. Indeed, many have been falling and it’s possible that share prices could go lower still.
But that’s where regular investing can become an advantage. By investing £20 a week, perhaps by buying shares each month, the process of pound/cost averaging can help to smooth out some of the volatility in the markets. That means I’d have over £1,000 a year to invest and those stock purchases could do well when recovery and growth arrive in the months and years ahead.
Of course, investment outcomes are never certain or guaranteed. But I think a lifelong programme of steady investing into solid, dividend-paying stocks has potential. And it may deliver a worthwhile investment performance in the end, despite the current uncertainties.
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Kevin Godbold owns shares in British American Tobacco. The Motley Fool UK has recommended British American Tobacco and GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.