The freedom of the open road has a lot of allure, especially right now. Another form of freedom which appeals to me is not having to work for every pound I earn. That is where I start to think about passive income ideas.
Passive income is money that comes in without having to work for it. If that sounds too good to be true, think about the last time you filled up at a petrol station. The attendant was there helping you, likely getting paid for every hour they worked in the petrol station. But the petrol station owner may not have had to lift a finger for years, instead receiving regular rental payments from the petrol company.
It may take a lot of money to buy commercial property like a petrol station. But not all passive income ideas need be so expensive. For example, drip feeding money regularly into a Stocks and Shares ISA can be a structured way to start building up funds with which to invest. That can generate a passive income. Best of all in my view, one doesn’t need to start with a single penny beforehand. Just putting in a small amount each month can form the base of future passive income. The average British car owner spends about £38 a month on insurance — a little more than a pound a day.
Profiting from car insurance
Think about your daily expenses. Each month, for example, millions of British drivers pay out for car insurance. No matter how tight things may seem financially, they pay to protect themselves and others when they drive. Similarly, putting aside £38 a month could form the basis of some passive income ideas.
Insurance can be a very lucrative business. But most drivers are only on one side of the equation. They pay money to insurers, but it is the insurers who profit from such situations. Savvy motorists may be in an insurance co-operative which shares profits between its members. But there are other passive income ideas based on motor insurance.
One is to invest in shares of the insurer. Some leading insurers pay out attractive levels of dividends. For example, currently Legal & General pays out 6.8%. Direct Line pays out 2.3%, which is less attractive to me, although I think diversifying across different passive income ideas can be a good way of reducing my risk. Just as a safe driver can be involved in an unexpected accident, a well-run company can also fall foul of unforeseen business shifts.
Passive income ideas beyond household names
Those are household names but there are other insurance-related shares which also merit investigation in my view. For example, Sabre Insurance is an insurer yielding 5.2%. Its focus is squarely on the motor insurance market. That could be good or bad over time – more diversified insurers such as Legal & General are somewhat protected against downturns in premium prices for motor insurance. But equally, when the premium cycle turns upward, they reap less of the benefit than a pure play motor insurer.
The insurance market tends to be cyclical, and when premiums turn down, than can negatively affect all motor insurers.
With enough road ahead, however, I think putting away the cost of car insurance each month into passive income ideas can be a rewarding drive. I’d start filling up immediately!
christopherruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.