Three types of passive income ideas compared

first_imgThree types of passive income ideas compared Passive income ideas come in all shapes and sizes. Some involve a lot of work – researching a market, setting up a business, and hoping that customers start to buy. I prefer the much easier option of tucking away whatever I can afford each month in a Stocks and Shares ISA, choosing some investments, and then waiting for the income to flow in.Even so, not all shares chosen as passive income ideas have the same characteristics. Here I explain three types of passive income ideas and which I prefer.5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…And if you click here we’ll show you something that could be key to unlocking 5G’s full potential…Slow and steadyA typical passive income choice would be a large company in a long-established industry with a history of payouts. The advantage of such a choice is that such companies’ revenues and profits tend to be fairly stable. With long experience in an industry, it should be well-entrenched and have the know-how to ride out changes in its marketplace.The downside of this type of passive income choice is that stable, well-run companies with a history of payouts for many years are often appreciated by lots of investors. That can drive their share prices up. That matters for passive income because a share’s yield is based on its share price. Even if it pays a big dividend, if the share price is high, the yield may be just average.An example of this kind of share is Unilever. While I think the consumer goods giant has solid long-term prospects, its yield of just over 3% is not that exciting to me. It would certainly produce some passive income, but not as much as I’d like.Slow and steady but unfashionable passive income ideasApplying the same principles, there is a group of industries whose characteristics look similar but which are nonetheless out of fashion. Tobacco and oil are examples. While there is debate about how long demand will last, some tobacco companies have a long history in a highly cash flow generative industry. But between worries about the long-term future of demand and the ethics of selling tobacco, the shares currently offer high yields.For example, British American Tobacco is yielding over 7%. BAT has raised dividends annually for two decades. So for passive income ideas, these are the sorts of shares I prefer to pick. Indeed, I have both BAT and Imperial in my own portfolio.High-yielding but cyclicalA third type of passive income share pick is companies that currently offer a high yield but that are in cyclical industries. Cyclical industries are ones where demand can go up and down every few years, affecting prices. Sectors such as energy extraction, raw materials, and mining tend to be cyclical.So, for example, Evraz currently has a double-digit dividend yield. That sounds attractive among passive income ideas. But my concern is about whether it can be sustained. The mining company is in an industry known for being cyclical. So while its current yield looks mouth-watering to me, I don’t see it as stable for the future. That makes it less attractive to me as a passive income choice. 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In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.And right now, we’re giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool. christopherruane owns shares of British American Tobacco and Imperial Brands. The Motley Fool UK has recommended Unilever. 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. Simply click below to discover how you can take advantage of this. Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!center_img “This Stock Could Be Like Buying Amazon in 1997” Image source: Getty Images. Enter Your Email Address I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement. Christopher Ruane | Wednesday, 27th January, 2021 See all posts by Christopher Ruanelast_img

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