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‘This is the time to be happy… and financially literate. As Christmas approaches, I’m glad I have an income stream that can help cover my holiday expenses. Not one to be a penny-pinching humbug, I like to make sure my coffers are filled with enough money.
But what is my strategy to achieve this much desired goal?
Passive income generally refers to regular income that is generated without regular involvement or the need for day-to-day management. In other words, the kind of income that can be earned while you sleep.
Here, I describe some effective and time-tested ways to achieve this type of income by investing in stocks. Certain types of stocks fit this strategy better than others but the key is a diversified portfolio aimed at solid, long-term gains.
Keep costs down
Another way to improve spirits this Christmas is to use ISA. No, not Ice Skating Adventure — Personal Savings Account. With a Stocks and Dividends ISA, people can invest up to £20,000 a year tax-free!
The new UK budget announced last month increased capital gains tax (CGT) from 10% to 18%, so an ISA is now more attractive than ever!
Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Stock picking like a pro
With an ISA ready to fill with Christmas stuff, it’s time to pick the best stock for income.
For those interested in income, equity stocks can be very attractive. These are shares of companies that pay a portion of their profits to shareholders on a regular basis, usually quarterly. The percentage paid is called the yield.
This helps in providing a predictable income stream. By reinvesting the gains, the value of the portfolio can grow rapidly due to the miracle of compounding returns.
Some sectors tend to be more trusted with benefits. For example, utilities, consumer staples, and certain financial institutions are known for their fixed dividend payouts. Another popular option is dividend-paying exchange-traded funds (ETFs), which provide exposure to many dividend-paying companies and provide diversification.
However, not all assignments are created equal. A high yield can be attractive, but it can also be dangerous if the financial health of the company is unstable. I look for companies with a strong track record of maintaining (or increasing) dividends, as they are likely to be the most reliable sources of income.
Stock to make Santa proud
My top stock pick this Christmas would be Diageo (LSE: DGE). As an international beverage giant, it is a staple in many income portfolios, especially those seeking exposure to the consumer goods sector. It is known for high-quality, tangible products that often sell well during the holiday season. Think about it Johnny Walker, Guinness again Tanqueray.
However, its focus on premium brands limits its access to price-sensitive markets where consumers may prefer to avoid paying higher prices. After inflation during the pandemic, it suffered losses after sales of its premium rum products in Latin America and the Caribbean declined. This reveals the stock’s sensitivity to economic downturns.
With 37 years of consecutive dividend increases, Diageo is considered a Dividend Aristocrat. Dividends have grown at an average of 5.5% a year over the past 15 years, from 21p per share to more than 80p. Yes, the price has fallen by 37% in the last two years – but with inflation, I expect it will start to recover soon.
I might consider buying some more shares for myself as an early Christmas present!
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