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Passive income can come from many different sources. One approach I like is to invest in proven blue-chip companies that I expect will pay considerable dividends in the future, without me having to work for them.
At this time of year, with the annual deadline to contribute to an ISA falling in next week, a lot of attention is being paid to trying to put as much as you can into an ISA in time.
But not everyone has a spare £20,000 lying around at the moment, not even a spare £20.
Fortunately, even a few pounds a day can help generate long-term passive income streams.
I already have a stocks and Shares ISA. But if it didn't, it would open today. Then drip feed three pounds a day, this is what I would do.
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Dividend quality, not just dividend yield
£3 a day would add up to almost £1,100 in a year. It is not an insignificant sum to invest.
Still, how much passive income could you earn?
With a 10% dividend yield, around £110 per year. but the average FTSE 100 The yield is closer to 4%, meaning investing for a year would earn me less than a pound a week in dividends.
One possible answer to this is to buy high-yield stocks. But dividends are never guaranteed. High performance can end up reaching zero overnight.
So when choosing stocks for my passive income plan, I would focus on finding stocks of great companies that are selling at attractive prices. Only then do I pay attention to performance.
At the end of the day, I like the passive income prospects of high-yield stocks as much as the next investor, but I don't only due to performance.
Find stocks to buy
Let me illustrate what I mean by looking for a great business with an attractive share price.
M&G (LSE: MNG) is a well-known asset manager. The fact that your name has broad recognition among target consumers helps give you a competitive advantage. You can attract new customers. The firm already has millions of clients.
Demand for asset management could vary. For example, with a weak economy, customers may need their money more, so they withdraw funds. That could hurt M&G's profits.
However, in the long term I expect high demand for asset management. That could help provide a continuing pool of potential customers for M&G.
The business looks cheap to me: it has generated considerable cash surpluses in recent years, but it has a market capitalization of less than £6bn.
The dividend has grown annually in recent years. M&G has a yield of 8.4%. So if you invested £100 today you would hopefully earn £8.40 a year in passive income.
Aiming at the target
I would buy a variety of stocks as they may not all do as well as I expect.
But even if I achieved an average return close to M&G's (say 8%), that would still earn me less than £90 a year on my annual savings of £3 a day.
Imagine, however, if you continued contributing £3 a day, while reinvesting the dividends.
By doing that, after 16 years you should be earning over £200 per month on average in passive income.
