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

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

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

edit Sale sign, value, discount
Investing

3 Cheap TSX Stocks to Buy Before July

Canadian markets have bounced back, but investors can still snag undervalued TSX stocks like Finning International Inc. (TSX:FTT).

Read more »

thinking
Investing

Is Blackline (TSX:BLN) Stock Worth Your Attention in 2022?

Blackline Safety Corp. (TSX:BLN) stock has struggled in the year-over-year period, but there are some positives to glean from its…

Read more »

stock analysis
Investing

Why I’m Buying the Dip in Andlauer (TSX:AND) Stock

Andlauer Healthcare Group Inc. (TSX:AND) stock offered exposure to two promising spaces while offering solid value in late June.

Read more »

clock time
Tech Stocks

Now’s the Time to Load Up the TFSA With These 2 Top TSX Stocks

Here are two top TSX stocks that long-term growth investors may not want to give up on, especially at these…

Read more »

data analyze research
Energy Stocks

TSX Stock Picks With Huge Potential

If you want a TSX stock that's bound for even more strong growth, these three are top picks by analysts.

Read more »

growing plant shoots on stacked coins
Investing

Market Plunge: Double Your Cash With 3 Bargain Stocks

These TSX stocks have corrected over 50%, despite their strong fundamentals, and could easily double from here.

Read more »

oil and natural gas
Energy Stocks

Can Cenovus Stock Outperform in H2 2022?

Is now the time for investors in Cenovus (TSX:CVE)(NYSE:CVE) stock to buy more, or wait out this volatility right now?

Read more »

cup of cappuccino with a sad face
Investing

The Biggest Regret a TSX Investor Can Have

Hydro One (TSX:H) is a top bond proxy to own if you're a TSX investor who's worried about a pick-up…

Read more »