I think investing in stocks and shares is one of the best ways to generate a passive income. Unlike other passive strategies, investing in the stock market does not require a massive amount of capital upfront.
Indeed, any investor can start buying equities today with just a few pounds. That means it could be possible to start generating an income almost immediately. This is not possible with other strategies, such as buy-to-let. Owning rental property requires tens of thousands of pounds upfront investment. And while income produced can be significant, it also involves a lot of extra work.
With that in mind, here is the strategy I would use to invest £250 a week for a passive income stream.
Investing for a passive income
One of the easiest ways to build a passive income portfolio is to acquire high-yield stocks. Companies such as Persimmon and British American Tobacco fit the bill perfectly. Both of these stocks support dividend yields of 8%, at the time of writing.
The one drawback of this strategy is the fact that, more often than not, a high yield is a sign that the market does not believe the payout is sustainable. This means it can be pretty tricky to pick high-yield stocks. It requires additional analysis of the business, its balance sheet and growth prospects.
Still, I would be happy to acquire both of these companies for my passive income portfolio. However, I would limit the exposure in my portfolio to around 20%. For the rest of the portfolio, I would try to invest in corporations that have more scope for capital growth, as well as income.
Unfortunately, this will mean sacrificing some income. Growth stocks tend to hold back a percentage of profits every year rather than distributing all of their income. Management can then reinvest this income back into the business to fund expansion plans.
I believe this is the best use of my £250 a week investment, as it will open the door to both income and capital growth. Some companies can reinvest profits at a double-digit rate of return, which is far more than I would be able to achieve by investing the same amount of money in income stocks.
Growth and income
A selection of companies I would buy for my passive income portfolio that have both income and growth credentials are IG Group, Hikma and Bunzl.
These firms may not be traditional income investments. Still, as I noted above, I think their capital growth could more than compensate for the lack of income.
Of course, this is not guaranteed. Any one of these companies could encounter growth headwinds, such as rising costs or competition in their respective markets. If costs rise substantially, or competition increases, they may not grow as fast as expected. In this scenario, they may have to reduce their dividends.
The post How I’d invest for a passive income with £250 a week appeared first on The Motley Fool UK.
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Rupert Hargreaves owns British American Tobacco. The Motley Fool UK has recommended British American Tobacco, Bunzl, and Hikma Pharmaceuticals. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.