3 Smart Money Moves I’d Make Today to Generate a Passive Income

Taking these steps could improve your chances of generating a sustainable passive income in my opinion.

Canadian Dollars

Image source: Getty Images

With the prospects for the world economy being uncertain at the present time, it may seem to be difficult to generate a sustainable passive income. Certainly, there is the potential for volatility over the near term, with factors such as a slowing US economy and a global trade war weighing on investor sentiment.

However, by focusing on stocks rather than cash, obtaining a high degree of geographical diversity and buying companies with a clear competitive advantage, obtaining a passive income may be easier than many investors realise.

Regional diversity

While it is always a sound move to have exposure to a variety of economies within a portfolio in order to reduce risk, it may be increasingly important at the present time.

The world economy faces a number of geopolitical risks that could inhibit growth in some regions. For example, Brexit may have a negative impact on the performance of companies that operate in Europe, while the US/China trade war could lead to a lower rate of growth for the world’s two major economies.

Therefore, investors who are seeking to generate a sustainable passive income may wish to broaden their geographic exposure so that they are less reliant on one region in particular. Doing so may mean that they avoid short-term localised risks, while also having exposure to potentially fast-growing economies over the long run.

Reduced cash

With the outlook for the world economy being somewhat challenging, there could be a rising prospect of interest cuts. The US, for example, is expected to reduce interest rates before the end of the year as a result of weaker-than-expected jobs growth and retail sales versus the previous year.

A looser monetary policy could be bad news for investors who carry large cash balances as a proportion of their portfolio. Certainly, keeping some cash on hand in case of emergency or to capitalise on falling stock markets could be a good idea. But the passive income that it generates may fail to improve relative to dividend stocks, for example.

Competitive advantage

Should the world economy experience a more challenging period, stocks that have a clear competitive advantage versus their peers could offer impressive return prospects. For example, they may have a strong brand or a lower cost base than rivals, and this could make them more resilient to difficult operating conditions.

While in some cases companies that have a competitive advantage may be priced higher than their peers, it can be worth paying a premium valuation for a better-quality stock. They may offer a higher chance of maintaining or even raising their dividends over the medium term, which could lead to a more appealing passive income for investors.

Furthermore, if investor demand for such companies increases in the coming months due to their lower potential risks, they may be able to outperform their wider sectors and indexes to provide support to an investor’s portfolio valuation.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

Question marks in a pile
Bank Stocks

Should You Buy Canadian Western Bank for its 4.8% Dividend Yield?

Down 35% from all-time highs, Canadian Western Bank offers a tasty dividend yield of 4.8%. Is the TSX bank stock…

Read more »

Gold bars
Metals and Mining Stocks

Why Alamos Gold Jumped 7% on Wednesday

Alamos (TSX:AGI) stock and Argonaut Gold (TSX:AR) surged after the companies announced a friendly acquisition for $325 million.

Read more »

tsx today
Stock Market

TSX Today: Why Record-Breaking Rally Could Extend on Thursday, March 28

The main TSX index closed above the 22,000 level for the first time yesterday and remains on track to post…

Read more »

Nuclear power station cooling tower
Metals and Mining Stocks

If You’d Invested $1,000 in Cameco Stock 5 Years Ago, This Is How Much You’d Have Now

Cameco (TSX:CCO) stock still looks undervalued, despite a 258% rally. Can the uranium miner deliver more capital gains to shareholders?

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

potted green plant grows up in arrow shape
Stocks for Beginners

3 Growth Stocks I’m Buying in April

These three growth stocks are up in the last year, and that is likely to continue on as we keep…

Read more »

clock time
Tech Stocks

Long-Term Investing: 3 Top Canadian Stocks You Can Buy for Under $20 a Share

These three under-$20 stocks offer excellent buying opportunities for long-term investors.

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »