It seems passive income is one of those phrases that’s very much ‘in vogue’ at the moment. But while an exotic lifestyle lived on the beach with nothing but a cocktail and a laptop-run drop shipping business might sound appealing, it’s also not a realistic option for most of us. Instead, I think the original forms of ‘passive income’ – shares and property – are probably still your best (and most realistic) bet for sustainable and reliable passive income.
And since I’m no property expert, let’s talk about building a passive income with shares.
This might come as news to anyone not well-versed in the stock market, but the majority of ASX companies will pay you a stream of passive income (a dividend) just for the honour of holding their shares. Dividends are (usually) paid twice a year and you can start with as little as $500 dollars (the minimum amount required to buy a parcel of shares on the ASX). Many investors buy shares looking for overnight Wolf-of-Wall-Street riches, but many more buy shares just for dividends because they are chasing a consistent passive income.
What to look for in a dividend
To paraphrase some anthropomorphised pigs from George Orwell’s satirical classic Animal Farm – some dividends are more equal than others. What does this mean? Well, there are really two types of dividend-paying companies you can seek (and I’m speaking very broadly here).
The first are established, large companies that offer big upfront yields. Think well-known companies like Commonwealth Bank of Australia (ASX: CBA) or Telstra Corporation Ltd (ASX: TLS) . These dividend shares offer large payouts, but not too much opportunity for big growth. Retirees love this kind of company because they can get a steady (passive) income.
The second are companies that do not offer a big upfront yield but have been growing their dividend every year at a healthy rate. These are known as ‘dividend-growth’ companies, and they are often more appealing for younger investors who don’t need income now but are seeking it for tomorrow. Ideally, you want to find the ‘next’ Commonwealth Bank or Telstra while they are cheap. Stocks like REA Group Limited (ASX: REA) or Appen Ltd (ASX: APX) are often viewed with this lens.
I think shares offer one of the best and most reliable forms of passive income out there. So if you like the idea of earning money from owning something, why not start doing some digging on the best dividend shares the ASX has to offer.
We Fools think these three here would be a good start!
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Motley Fool contributor Sebastian Bowen owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of Appen Ltd. The Motley Fool Australia has recommended REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.