There are lots of passive income ideas. Not all are created equal – or even vaguely equal. One of my favourite passive income ideas is investing in dividend shares. But not everyone understands dividend shares, or their potential to generate extra money for their owners. Here are three reasons I like them.
1. World class businesses
If I put money into a bank account, I basically receive the payment the bank is getting from other customers to borrow it, minus the bank’s cut. In a competitive financial services market with low interest rates for now, that means that my likely passive income will be fairly meagre.
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By contrast, investing in dividend shares allows me to benefit from large, well-established businesses generating substantial profits. An example is British American Tobacco. One of the leading tobacco business globally, its shares currently yield 8%. In other words, if I invested £1,000 today, I would expect to receive £80 in dividend income annually.
Now, there’s a risk that won’t happen. Dividends aren’t guaranteed and as cigarette use falls, so might profits at British American Tobacco. But by diversifying my passive income streams across a number of shares, I seek to benefit from the business expertise of successful companies. I expect that to offer greater possible returns than bank interest.
2. In and out
I am an investor, not a speculator. So I don’t try to move in and out of shares quickly. Instead, I aim to choose companies I think have strong long-term potential. I then buy them in my portfolio to hold.
However, that doesn’t mean I never sell. Of course, circumstances can change and a company’s outlook can vary from one year to the next. If I set up my own business to generate passive income, moving in and out of it might not be so easy. …….