3 simple ways to achieve passive income on the stock market

The idea of ​​generating passive income from stocks is extremely attractive because it allows me to receive money without having to actively work for it. And who doesn’t want that?!

Whether I want to supplement my income or ensure a steady flow of future profits, the stock market offers several strategies to achieve this goal.

Here I will discuss three of them.

The first and most obvious way is to put a lump sum into a few stocks and wait for the dividends to arrive in my investment account. Then I can spend the money.

For example, let’s assume I invest PLN 20,000. pounds (the annual ISA allowance for tax-free gains) into a portfolio of five dividend shares. If the average yield on these is 6%, I would expect to receive £1,200 in annual passive income.

I say “expect” because individual dividends are not a sure thing. Serious situations may arise – financial panics, wars, global pandemics – that force companies to cut or cancel payouts. Businesses may also face individual difficulties.

Therefore, diversification is the key to building a portfolio.

Fortunately, UK investors have plenty of choice when it comes to high-yield dividend stocks. There are nine offers available on the market with a rate of return above 6%. FTSE100including the banking goliath HSBC and insurer Aviva. There are many more of them in FTSE250.

Please note that tax treatment depends on each client’s individual situation and may change in the future. The content of this article is for informational purposes only. It is not intended to be and does not constitute any form of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

Reinvest dividends

A second strategy could be to reinvest the cash dividends you receive, rather than spending them. This is called dividend reinvestment.

For example, let’s say I have a total of £4,000 British-American tobacco shares and pay me a current rate of return of 8.5%. This comes with a quarterly dividend of 58.8p per share, which means I will receive around £85 every three months (or £340 a year).

Instead of spending this money, I could use it to buy more shares. Then ideally they would pay me more dividends and so on. This would harness the power of compound interest (the magic of building wealth).

This is, of course, a form of delayed gratification. This involves reinvesting your payments back into your fuel storage for higher potential passive income in the future.

I strive for growth

The third way is to try to raise funds faster by investing in fast-growing companies.

One option today could be Uber technologies (NYSE:UBER). I recently invested in a passenger transport and food delivery giant whose shares will increase by 25% in 2024.

However, one of the threats I see here is the rise of autonomous vehicles (AV or robotaxis). If self-driving car companies develop their own consumer apps, Uber could one day be sidelined as an intermediary platform.

To combat this, it has partnered with all the big AV companies, enabling them to tap into its massive user base of 156 million. But AVs remain a potential risk.

Still, after years of steep losses building market share, Uber’s profits are now higher. Analysts predict profits will more than double over the next few years.

By 2026, Wall Street expects revenue of $58 billion, up from $37.3 billion last year. That’s tall, alright!

If my £20,000 portfolio of these shares grows at 11% a year, after 25 years I will have £271,709. Then, if I switched to dividend shares yielding 6%, I would receive £16,302 a year in passive income.