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Karl Loomes | Thursday, October 29, 2020
Passive income has been a buzzword for a few years It can take many forms, from publishing a book to starting a business For me however, the stock market is one of the best and simpler ways to earn passive income
Passive income, as the name suggests, is an attempt to receive money with little to no continuous effort For many it is the dream – to have enough money so that they can quit their jobs and retire earlier Images of sitting on a sandy beach sipping champagne come to mind
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Of course, getting that level of passive income can be very difficult Starting a business or publishing a book may not be right for many And even if it is, there is no guarantee that it will be successful
Although it is often not mentioned in the same context, millions of people have been earning passive income for decades – long before the term itself was used This passive income comes from investing
While fixed income bonds offer a guaranteed return (assuming they don’t default), with interest rates as low as they are now, that’s negligible The stock market, however , can offer much better returns thanks to dividends
First, a few caveats The stock market, of course, has a lot of price fluctuations If you buy a stock today for its dividend, tomorrow it could be worth half of its value if something really goes wrong. No dividend will compensate for this
Also, unlike bonds, a stock’s return is not guaranteed over a significant period.If a company makes less money, it can reduce or even suspend its dividend Fortunately, these risks can be mitigated by sound decisions and good advice
First, plan to invest for the long term If you can’t afford to lock in your money for five years or more, short term price swings may be too big for you Even the best companies will see their prices drop sometimes You need to be able to hold on when they do
To help you out, look primarily at large blue-chip stocks, preferably companies with strong brands Although this is not a guarantee, large, well-established companies are better able to weather financial turmoil They also tend to have more liquidity available to investors
To help you choose stocks, look for companies that have paid dividends consistently for, say, five years If a company has a dividend one year, none the next day, half again this year, it probably isn’t the right choice
You also want to look for a stock that has also increased its dividend over time Growth that beats inflation should be enough
The last consideration is in many ways the main one: yield While five-year bonds only pay a few percentage points, it’s quite easy to find solid stocks paying 5% or more
Ideally, look for stocks with a dividend yield between 3% and 6% Anything less is not worth it, and nothing more can be unsustainable
However, keep in mind that the yield of a dividend is based on the share price An oversold stock will mean an artificially inflated yield Always be on the lookout for these type of opportunities to increase your income passive at lower cost
And with so many large companies trading at prices that appear to be discounted prices, now may be the time for savvy investors to strike a bargain
But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect in these unprecedented times.
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You see, here at The Motley Fool, we don’t think over-trading is the right route to financial freedom in retirement; instead, we advocate buying and owning (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm
This is why we are sharing the names of these five companies in a special investment report which you can download today for free. If you are 50 or older, we think these stocks could be a perfect fit for any portfolio well diversified, and that you can immediately consider creating a position in the five
The opinions expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations that we make in our subscription services such as Share Advisor, Hidden Winners and Pro At The Motley Fool, we believe that taking into account a diverse range of information makes us better investors
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Important Information and Disclaimer: The value of shares and any income generated may go down as well as up, and you may get back less than you invest Fluctuations in exchange rates may reduce the value in pounds sterling by have everything abroad
To help you make the best choice, The Motley Fool’s MyWalletHero has reviewed and ranked some of the UK’s top stock brokers Check out our top picks for the best stock brokers
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The value of stocks and stocks and any dividend income can go down as well as up and are not guaranteed, so you can get back less than you have invested You should not invest money that you cannot afford to lose and cannot should not rely on dividend income to cover your living expenses Shares listed on a foreign exchange may be subject to additional trading and exchange fees, administrative fees, withholding taxes, different accounting and reporting standards, may have other tax implications and may not offer the same regulatory protection or any protection Currency exchange charges can have a negative effect on the value of shares in pounds sterling and you could lose money in pounds sterling even if the stock increases in the original currency. Any performance statistics that do not adjust for changes in the exchange rate are likely to lead to inaccurate actual returns for UK sterling investors
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