I think investing in the stock market for passive income is a great strategy. Unlike other income strategies, such as buy-to-let investing, it is possible to start investing in the equity market with a lump sum as small as £10.
I can also invest alongside some of the best company managers globally, who will take care of the day-to-day management of these businesses. Unlike investing in rental property, I do not have to worry about chasing tenants for rent. I can leave that job to the companies’ CEOs.
It is also possible to build a more diversified portfolio with stocks and shares. I can invest in companies in different industries all over the world with the click of a button.
Unless I had a few million pounds in startup capital, it would be virtually impossible to replicate the same kind of diversification with property.
With that being the case, here is how I would invest in the stock market for passive income in 2022.
Passive income investments
While I am not going to be buying a rental property, I would purchase homebuilders for my portfolio. The UK housing market is structurally undersupplied. That is good news for companies like Persimmon and Taylor Wimpey, some of the largest listed UK home builders.
Considering their position in the construction market, I think these companies can continue to generate healthy amounts of cash. They are both returning as much cash as possible to investors with dividend yields of 8% and 7%, respectively.
Still, while these companies are dividend champions today, I will be keeping an eye on supply chain pressures. These could increase their costs and reduce the amount of cash available for distribution to investors.
I would also buy utility suppliers for my passive income portfolio in 2022. Companies like United Utilities and Severn Trent would fit the bill perfectly. Together these companies support an average dividend yield of around 3.5%. This is not the highest yield available on the market, but it is backed by the income from these companies’ water assets.
In my opinion, it is worth sacrificing yield for the defensive qualities in this situation.
However, I will also be keeping an eye on the regulatory situation around these companies. Regulators are threatening to clamp down on excessive profit margins in the water sector. This could lead to reduced dividends.
According to my calculations, if I invested £10,000 in the four companies above, I could generate an annual dividend yield of 5.5%. That would give me a passive income of £550 a year.
If I could invest a lump sum of as much as £250,000 in these equities this would be enough to generate a passive income of £13,750 per annum or £1,145 a month. This excludes any capital growth earned on the shares. These are the reasons why I believe this strategy is the best way to generate a passive income.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.