Image source: Getty Images
Generating passive income is a common financial goal and it’s not hard to see why. Life is expensive and a bit of extra cash can make a huge difference.
Interested in creating a solid passive income stream that brings in a substantial amount of cash every year? Here’s my top tip.
The secret to passive income
There are many different ways to generate passive income today. Personally, I have a few different strategies that bring in cash with minimal effort.
My key tip for those seeking passive income is: become a business owner. But I need to clarify a few things here.
Money for nothing
There are two main types of business owners – active owners and passive owners.
The first type trades time for money. An example here is someone who actively runs a coffee shop.
The second type owns the business but does no work themselves. This type of owner puts in minimal effort but still gets a large chunk of the profits.
Becoming the second type of owner is the key to generating passive income, in my view. Because with this set-up, we’re paid for doing almost nothing.
Easy to get started
Now, I realise that not everyone has the financial resources to go out and buy a whole business. To become a passive business owner, however, you don’t need to.
Today, anyone can become a business owner by buying shares in a company. As a shareholder, you’re essentially a part-owner of the business and that means that you’re entitled to a share of the profits.
If the business pays out its profits to shareholders in the form of dividends, you’re entitled to a share. That means regular cash payments coming into your account.
It’s worth pointing out that today, investors can start buying shares with just a few hundred pounds. So, becoming a part business owner really is a possibility for just about everyone.
Of course, finding good businesses to invest in can have its challenges. But that’s where resources like The Motley Fool come in.
This UK business throws off a ton of cash
One stock that I believe is worth considering for passive income is M&G (LSE: MNG). It’s a well-established savings and investment business that operates globally.
For the 2024 financial year, it paid its investors 20.1p per share in dividends. So, if someone owned 2,000 shares in the company today (a stake worth around £5,200), they received about £400 in dividends.
Note that this translates to a dividend yield of about 7.7%. That’s a far better return than cash savings accounts provide at present.
Now, it’s worth pointing out that when someone is a part-owner of a business, they always face some risks of investment losses. With this company, there are risks around volatility in the financial markets and competition from bigger, more powerful players.
I like the overall risk/reward proposition though. The company is performing well today – with profits on the up – and its valuation is very reasonable.