It’s easy to see the appeal of passive income. Earning money without having to do anything for it could help provide an easier, more enjoyable life. So I understand why people are often hunting for passive income ideas.
The question I have with a lot of passive income ideas is whether they actually work in practice. Some sound great in theory. But they can involve a lot of effort for not very much reward. Also for some of them I think there is a first mover advantage. People who try to replicate a successful passive income idea in a niche may get less reward from it. Here are some things I think really do work when considering ideas for passive income.
I like passive income ideas that really are passive
Something that strikes me immediately about a lot of passive income ideas is that they actually require a lot of work. From setting up the income stream, to monitoring it and dealing with problems along the way, it seems to be a surprising amount of activity! Ideas such as dropshipping sound straightforward at first. But finding suppliers, managing customers, and arranging logistics is not my idea of passiveness.
Instead, I would go for a passive income idea which really is passive. I’d want to put some money in at the start – even a little bit – then sit back after that and do almost nothing except watch the results.
As well as money, I also consider the time investment in any moneymaking scheme. So a passive income idea that requires me to spend a lot of time learning about something new such as customer needs or software programming doesn’t strike me as passive. It seems rather like spending a lot of time upfront in an effort to make uncertain income down the line. Again, I would prefer a genuinely passive income idea. I can try to achieve that by focusing on areas which are already inside what Stephen Covey terms my “circle of competence”.
I’d focus on meaningful income
A lot of passive income ideas seem quite unduly optimistic to me. The reality is that they depend on all sort of variables outside my control, such as customer demand and supplier quality. In many such cases I expect that I would end up making some money – but not enough to justify my time and effort. Instead, I would look for a passive income idea where the likely income would be more transparent and substantial.
In fact that’s exactly why I invest money in high income yielding shares like British American Tobacco. With diversification across a few names, I believe it is possible to get a fairly stable, predictable passive income stream. Crucially, the income is substantial. For example, British American Tobacco currently pays out around 7.8% a year in dividends. With a long history of raising dividends and ample cover from earnings, I am not expecting the dividend income to fall any time soon.
I think that captures the essence of a passive income idea that works well. It needs to be genuinely passive and offer substantial income. While it’s easy to hunt for the next big passive income idea, I think some very obvious ones are worth investigating.
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christopherruane owns shares of British American Tobacco. The Motley Fool UK has no position in any of the shares mentioned. 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.
Motley Fool UK 2020