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‘Tis the season to be jolly… and financially savvy. As Christmas approaches, I’m glad I have a passive income stream to help cover my holiday expenses. Not one to be a penny-pinching humbug, I like to feel confident my coffers are flush with enough cash.
But what’s my trick to achieving this much-coveted goal?
Passive income generally refers to regular income generated without constant involvement or the need for day-to-day management. In other words, it’s the kind of income that can be earned while sleeping.
Here, I detail some practical and time-tested ways to achieve this type of income by investing in stocks. Certain types of stocks fit this strategy better than others but the key is a diverse portfolio geared toward steady, long-term gains.
Keep costs down
One way to boost spirits this Christmas is with an ISA. No, not an Ice Skating Adventure — an Individual Savings Account. With a Stocks and Shares ISA, individuals can invest up to £20,000 a year tax-free!
The new UK budget announced last month raised capital gains tax (CGT) from 10% to 18%, so an ISA’s now more attractive than ever!
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Stock-picking like a pro
With an ISA ready to fill with Christmas goodies, it’s time to pick the best income stocks.
For those interested in passive income, dividend stocks can be highly attractive. These are shares of companies that pay out a portion of their profits to shareholders on a regular basis, usually quarterly. The percentage paid out is called a yield.
This helps to provide a predictable income stream. By reinvesting the dividends, the portfolio value can grow exponentially due to the miracle of compounding returns.
Some sectors tend to be more reliable for dividends. For example, utilities, consumer staples, and certain financial institutions are known for their consistent dividend payouts. Another popular option is dividend-paying exchange-traded funds (ETFs), which offer exposure to multiple dividend-paying companies and provide diversification.
However, not all dividends are created equal. Higher yields can be attractive, but they can also be risky if the company’s financial health’s shaky. I look for companies with a strong track record of maintaining (or growing) dividends, as they’re likely to be more reliable income sources.
A stock to make Santa proud
My top stock pick for this Christmas would be Diageo (LSE: DGE). As a multinational beverage giant, it’s a staple in many income portfolios, especially those seeking exposure to the consumer goods sector. It’s known for high-quality, recognisable brands that tend to sell well during the holiday season. Think Johnnie Walker, Guinness and Tanqueray.
However, its focus on premium brands limits its reach in more price-sensitive markets where consumers may prefer to avoid paying high prices. Following pandemic-era inflation, it suffered losses after a drop in sales of its premium rum brands in Latin America and the Caribbean. This reveals the stock’s sensitivity to economic downturns.
With 37 years of consecutive dividend increases, Diageo’s considered a Dividend Aristocrat. Dividends have grown at a rate of 5.5% a year for the past 15 years, from 21p per share to over 80p. Yes, the price is down 37% over the past two years – but with inflation falling, I expect it will start recovering soon.
I might even consider buying myself some more of the shares as an early Christmas gift!
