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Passive income’s becoming increasingly focused on by some investors. I think this is partly due to ongoing concerns about the UK economy and job security. It also could be to do with the fact that we are an ageing country, so income into retirement’s on people’s mind. Whatever the case may be, using the stock market to build such a cash stream’s possible.
Different avenues to take
To make sizeable passive income from stocks, there are three main routes to go down. One is to buy growth stocks with the aim of getting large scale share price appreciation. Over time, the profits from the rising stock price can be trimmed, enabling an investor to bank a portion of the profits and using this as income.
A second option is to invest in dividend stocks. These typically pay out income via a dividend a couple of times a year. With a pot of several income shares, it’s possible to receive some cash each month. Of course, dividends aren’t guaranteed, so investors need to be careful in assuming that the current dividend payments will continue into perpetuity!
Finally, a strategy can be to merge the two together. In practical terms, this means having a mix of growth and income stocks in a portfolio. Then there’s flexibility to generate cash proceeds both from potential share price movements as well as dividend payments.
Income and growth
Some stocks could offer the best of both worlds for a potential investor to consider. For example, PayPoint (LSE:PAY). The UK-based company provides convenient payment and retail solutions, with most of us likely having used the service at a local shop or petrol station.
Over the past year, the stock’s rallied by 40%, with a dividend yield of 5.53%. In this sense, it could offer an investor both the growth element and also income. It’s not a new business, but has the scope for further expansion.
In the half-year results, it spoke about how the “strategic investments made in Yodel and obconnect strengthen two core areas of our business, enhancing future growth and opportunities in parcels and Open Banking”.
It’s true that there are many avenues the company could go down to grow further. With the business posting a half-year profit before tax of £23.1m, I don’t see the dividend under any immediate threat. However, one risk is that should the company want to fuel a future acquisition or expand in a new market, management might decide to retain the dividend for a period to help fund this.
Talking numbers
If an investor could put away £500 a month and obtain an average yield of 8% from the portfolio, the total size could increase over time. After 15 years, the pot could be worth £174.6k. This means that in the following year, even without adding any fresh money, it could generate an investor £1,164 each month, on average.
Of course, these numbers are by no means guaranteed. But it does highlight roughly the size of investment and the target return needed to try and make this strategy work.
