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A common way to generate passive income is to receive dividends from the shares of blue-chip companies. This way, I can benefit from the hard work and business acumen of established companies with proven business models.
If I had £8,900 in cash or savings today, here's how I'd use it to generate passive income.
Understanding the plan
In my opinion, the approach is simple. My goal is to earn passive income, so I would buy stocks that I think are likely to pay large dividends over the next few years. I wouldn't focus on share price growth, although when investing I would still be careful when valuing companies, in the hope that I wouldn't overpay.
I would invest in a number of different companies to spread the risk. A target of £8,900 is enough for that. My first step would be to open a share trading account or a stocks and securities ISA and invest my money there.
Finding stocks to buy
When choosing fixed-income stocks for my portfolio, I would stick to industries that I understood and felt I could understand.
An example of a stock I would happily buy right now if I had extra cash to invest is Hollywood Bowl (LSE:BOWL) The leisure market is sizeable and I expect it to remain that way over time.
As a leading bowling alley operator, Hollywood Bowl has a competitive advantage in that market, from prime locations to economies of scale. It also operates mini-golf centers.
That has been a recipe for success, with the first half posting a net profit of £22m on revenue of £119m. In my opinion, that's an impressive net profit margin – £18m! That profit helps fund the dividend, and the dividend yield is currently 3.7%.
The interim dividend was up 22% compared to last year. However, during the pandemic, the dividend was cancelled. That highlights a consistent risk I see for the Hollywood Bowl: that any sudden downturn in the entertainment sector could severely impact earnings. However, as a long-term investor, I like the business and would be happy to own a piece of it.
Creating income streams
The Hollywood Bowl's yield of 3.7% is above the 3.3% average for the FTSE 250 Index index of which the company is a member.
Still, I think I could achieve a significantly higher return, say 7%, if I stick to blue-chip stocks. FTSE 100 Index and FTSE 250 companies that meet the criteria I illustrated in my view of the Hollywood Bowl.
If you were to invest £8,900 at an average return of 7%, you should earn £623 of passive income per year.
Since we're already past the halfway point of 2024, I don't expect to make that much this year, but I should make that much next year and every year after that as long as I hold the stock, if the companies I invest in maintain their dividends.
If they were removed, I might make less, but I hope that choosing the right businesses will actually mean I benefit. growing passive income streams over time.
