Passive income doesn’t have to be complicated
One of the best things about investing for passive income is that it doesnât have to be complicated. Itâs all about generating cash with as little work as possible and thatâs what makes it great.
Thatâs never been more true than it is now. While other investors are busy trying to figure out the implications of AI agents and GLP-1 drugs, dividend investors are just sitting there collecting cash.
Keeping it simple
Companies have a choice about what they do with their cash. Some of them invest it to try and grow their future revenues and profits, while others return it to shareholders as dividends.
With the first type of business, investors need to pay attention to what management is doing. As an example, Meta Platforms is spending heavily on AI infrastructure.
Is that going to work out? My strong suspicion is that even the firmâs management doesnât know for sure, but itâs something investors canât afford to ignore â itâs their money thatâs being spent.
In other cases, companies use their profits to acquire other businesses. UK industrial conglomerate Halma is a great example of an organisation that does this a lot.Â
In this situation, investors have to pay attention to the deals that the firm is doing, especially as it gets bigger. The desire to do more deals to keep the growth going can create a risk of overpaying.
When a company returns its cash to shareholders, though, these questions go away. Instead of trying to work out what the business does with the cash, investors can spend it themselves.
REITs: the ultimate simplicity
Real estate investment trusts (REITs) might be the ultimate in passive income simplicity. These are firms that let properties to tenants and are required to distribute the income to investors.
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One of the best examples is Realty Income (NYSE:O). The company owns a portfolio of retail assets and investors have enjoyed dividend payments every month for over three decades.
A closer look at the firmâs strategy reveals the source of this consistency. It focuses on high-quality tenants to minimise the risk of defaults and uses triple-net leases to limit maintenance costs.
Realty Incomeâs average lease has another nine years to run, so the business is also more predictable than most. And the majority of contracts include built-in increases to offset inflation.
One thing investors do need to pay attention to is the firmâs upcoming debt. Some of this matures before the average lease is due for renewal, so higher interest costs might mean lower margins.
No business is entirely automatic. But for investors looking for a company that has a simple, uncomplicated model, this might be one of the best examples around.
And relax
In general, investors who own shares in REITs donât have to worry about the complicated noise that the stock market is currently struggling with. They just need to focus on two things.
One is whether tenants are going to be able to pay their rent. And the other is the firmâs ability to manage its balance sheet effectively while returning cash to shareholders.
On both counts, I think Realty Income scores very highly. So I think itâs a great stock for investors looking for monthly passive income to check out.
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Stephen Wright has positions in Realty Income. The Motley Fool UK has recommended Halma Plc and Meta Platforms. 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.
