It’s no surprise that my preferred method of earning passive income is by investing in the stock market. I’ve found it fits well into my current lifestyle and financial situation — but that doesn’t necessarily mean it’s the ‘best’ option.
So I decided to see what the world’s favourite generative AI bot had to say on the matter. I simply asked ChatGPT: “What’s the best way to earn passive income.”
This was its response…
It depends
There’s no single ‘best’ way to earn passive income – the right approach depends on how much capital you have, how hands‑off you want to be, your risk tolerance, and your tax situation.
Fair play, that’s a pretty smart response. And it’s right: each individual needs to consider the idea of earning extra income based on their own personal situation.
However, expanding on its response, the chatbot did lean towards dividend investing. It went on to discuss how a diversified portfolio of income‑producing assets could be the “most reliable and scalable route” for UK residents. This is particularly true when you take into account the tax benefits of using a Stocks and Shares ISA or a SIPP.
Most other passive income strategies don’t offer any tax relief.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
So how can a beginner approach the idea of dividend investing without taking on too much risk?
The cautious approach
Earning income from investing in stocks is not a ‘get-rich-quick’ scheme — it requires massive amounts of patience and dedication.
But that’s not a bad thing — slow and steady growth beats quick money almost every time. Trust me, in the end, an income stream built on a stable foundation will last much longer.
So how do we build that?
An income-focused portfolio shouldn’t just be dividend shares — a foundation of highly-established defensive stocks is just as important.
Then you can add the high-yielders and a few growth stocks to keep the momentum going.
A few examples
The foundational shares that I’ve trusted for years include Lloyds, Tesco, Unilever, GSK, and National Grid. You could also opt for an actively managed fund like City of London Investment Trust, which includes 70 to 80 stocks on the FTSE 100 and FTSE 250.
When it comes to dividend shares, I screen for stocks with strong dividend coverage and a long history of payouts. British American Tobacco is a good example, along with Shell and Legal & General.
But one dividend stock that’s been increasingly catching my attention lately is Investec (LSE:INVP). With a 6% yield, it sits firmly in high-yield territory, and has the payment history to back it up.
The share price has shown promise too, climbing 115% over five years. That helped the bank secure a place in the FTSE 100 this year.
So what could go wrong?
The bank has offices in South Africa and the UK, which adds regional diversification — but also risk.
Many investors fear the political situation in South Africa is unstable, and if the currency devalues it could hurt Investec’s profits. At the same time, it’s a key financial hub for Africa, a continent with exceptional growth potential. So it could swing either way.
Latest results show strength: revenue up 4.2%, operating profit up 3.4%, and a 9.6% increase in net core loans.
Falling interest rates could hurt profits, but for now, I think it’s a top passive income share to consider.
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Mark Hartley owns shares in British American Tobacco, Lloyds, Legal & General, Tesco, Unilever, GSK, National Grid, and City of London Investment Trust.
This story originally appeared on Motley Fool
