Image source: Getty Images
I just did a quick search online for passive income ideas and an eclectic variety of suggestions came up. One of them involves starting a vending machine business. I can see the appeal here, as the cost of starting such a company seems to be mostly buying the machines and storing them. Then I only collect the money from the transactions.
Obviously, there’s also maintenance work, resupply, and some research involved to find prime locations. But I can see the attraction. That’s probably why stock picking legend Warren Buffett did something similar as a teenager, investing $25 to buy a pinball machine in 1946.
A much more popular passive income idea is dropshipping. Basically, this boils down to reselling products without having to stock any stock or fulfill customer orders directly. Again, it sounds good, in theory.
Dropshipping income doesn’t seem very passive
Due to the extremely low barriers to entry in the dropshipping space, competition is very high. That means hundreds or even thousands of companies may be offering the same product as mine. That means I’m going to have to pay for and optimize ads to find an audience for the product I’m selling.
In addition, I will have to cultivate customer relationships and encourage future orders. And for whatever reason, it’s almost inevitable that some customers want to return products. That could create headaches in coordinating with the actual provider.
This all sounds like a lot of work to me, which I guess is not what most people really want when looking at dropshipping.
In fact, passive income is classified as “unearned income” by the United States Internal Revenue Service. But getting money from a dropshipping business that I have built after a lot of effort and thought does not seem undeserved to me. Sounds like the fruits of my labor (probably a lot).
However, when I receive my regular dividends from people like mcdonald’s and legal and general, it is undeserved. He is passive income. Assuming nothing causes the company to lower or cancel your payout (which is always a risk with dividend stocks), the money only shows up semi-regularly in my trading account.
I can use this passive income to help finance my lifestyle. Or, more often than not, I reinvest these dividends and buy more shares. These additional actions can generate even more income for me. And so on, like a snowball, until the returns start to add up.
Warren Buffett: A Lifetime of Compounding
The ‘Oracle of Omaha’ has often said that his wealth can be attributed to the power of compounding returns. He bought his first share on March 11, 1942, when he was 11 years old. But one notable fact is that he has generated over 90% of his wealth (estimated at over $100 billion) since he turned 65.
His holding, Berkshire Hathawayyou regularly receive ever-increasing dividends from investments you made literally decades ago.
Now, it’s not wise to just buy a bunch of random stocks and expect passive income. Businesses must have valuable products or services, strong profits, and strong competitive positions. And not be grossly overrated.
So there is some investigative work involved upfront. But once I’ve invested in such quality companies, any income they pay me is genuinely passive.
var config = {
apiKey: ‘1ed121d592e04642d57912bb369ef696621661a3’,
product: ‘PRO_MULTISITE’,
logConsent: false,
notifyOnce: false,
initialState: ‘NOTIFY’,
position: ‘LEFT’,
theme: ‘DARK’,
layout: ‘SLIDEOUT’,
toggleType: ‘slider’,
iabCMP: false,
closeStyle: ‘button’,
consentCookieExpiry: 90,
subDomains : true,
rejectButton: false,
settingsStyle : ‘button’,
encodeCookie : false,
accessibility: {
accessKey: ‘C’,
highlightFocus: false },
onLoad: function () { // hide Cookie Control recommended settings button.
var recommendedSettingsButton = document.getElementById(‘ccc-recommended-settings’);
if (recommendedSettingsButton) {
recommendedSettingsButton.classList.add(‘hide’);
} },
text: {
title: ‘Privacy Notice’,
intro: ‘This site uses cookies, pixels, and other similar technologies to improve your web site experience and to deliver you personalised ads about our own and third party products and services. Please read more about how we collect and use data about you in this way in our Cookies Statement in our Privacy Policy. You can change your cookie settings in your browser at any time. ‘,
necessaryTitle: ”,
necessaryDescription: ”,
thirdPartyTitle: ‘Warning: Some cookies require your attention’,
thirdPartyDescription: ‘Consent for the following cookies could not be automatically revoked. Please follow the link(s) below to opt out manually.’,
on: ‘On’,
off: ‘Off’,
accept: ‘Accept’,
settings: ‘Cookie Preferences’,
acceptRecommended: ‘Accept Recommended Settings’,
notifyTitle: ‘Privacy Notice’,
notifyDescription: ‘This site uses cookies, pixels, and other similar technologies to improve your web site experience and to deliver you personalised ads about our own and third party products and services. Please read more about how we collect and use data about you in this way in our Cookies Statement in our Privacy Policy. You can change your cookie settings in your browser at any time. ‘,
closeLabel: ‘Save Preferences and Close’,
accessibilityAlert: ‘This site uses cookies to store information. Press accesskey C to learn more about your options.’,
rejectSettings: ‘Reject All’,
reject: ‘Reject’,
},
branding: {
fontColor: ‘#fff’,
fontFamily: ‘Arial,sans-serif’,
fontSizeTitle: ‘1.2em’,
fontSizeHeaders: ‘1em’,
fontSize: ‘1em’,
backgroundColor: ‘#313147’,
toggleText: ‘#fff’,
toggleColor: ‘#2f2f5f’,
toggleBackground: ‘#111125’,
alertText: ‘#fff’,
alertBackground: ‘#111125’,
acceptText: ‘#ffffff’,
acceptBackground: ‘#111125′,
buttonIcon: null,
buttonIconWidth: ’64px’,
buttonIconHeight: ’64px’,
removeIcon: false,
removeAbout: false },
necessaryCookies: ( ‘wordpress_*’,’wordpress_logged_in_*’,’CookieControl’,’PHPSESSID’,’fivc’,’fivs’,’fivp’,’Ookie’,’Fool_subinfo’,’_gads’,’_gid’,’_gat’,’_ga’,’__utma’ ),
optionalCookies: (
{
name: ‘Sharing’,
label: ‘I would like content tailored to my personal preferences.’,
description: ‘We work with advertising partners to show you ads of products and services you may be interested in. You can choose whether or not to have ads delivered in a personalised way by setting this option. You can return to review this setting at any time by clicking the "C" logo in the bottom left corner of any page.’,
cookies: ( ‘_ga’, ‘_gid’, ‘_gat’, ‘__utma’, ‘_gads’ ),
onAccept: function () {
// Add Facebook Pixel
!function(f,b,e,v,n,t,s)
{if(f.fbq)return;n=f.fbq=function(){n.callMethod?
n.callMethod.apply(n,arguments):n.queue.push(arguments)};
if(!f._fbq)f._fbq=n;n.push=n;n.loaded=!0;n.version=’2.0′;
n.queue=();t=b.createElement(e);t.async=!0;
t.src=v;s=b.getElementsByTagName(e)(0);
s.parentNode.insertBefore(t,s)}(window,document,’script’,
‘https://connect.facebook.net/en_US/fbevents.js’);
fbq(‘init’, ‘901682110316659’);
fbq(‘track’, ‘PageView’);
fbq(‘consent’, ‘grant’);
// End Facebook Pixel
// Enable Google ad personalization
// gtag (‘set’, ‘allow_ad_personalization_signals’, true ) ;
},
onRevoke: function () {
fbq(‘consent’, ‘revoke’);
// Enable Google ad personalization
// gtag (‘set’, ‘allow_ad_personalization_signals’, false ) ;
},
recommendedState: ‘on’,
lawfulBasis: ‘consent’,
},
),
statement: {
description: ”,
name: ”,
url: ‘https://www.fool.co.uk/help/privacy-and-cookie-statement/’,
updated: ”
},
};
CookieControl.load(config);
