How I’d invest £4,000 today for long-term passive income

The stock market can be a great way to earn passive income. By buying stocks and waiting for dividends, investors can start making extra money without having to do anything.

On 6 April, I will be able to start using my new Stocks and Shares ISA contribution limit. And I have a special plan for the first £4,000.

Cash bonus

My first order of business is to give myself as much as possible to invest with. That’s why I’m going to start by putting £4,000 into a Lifetime ISA (LISA).

Up to a limit of £4,000 per year, LISA deposits are supplemented by a 25% government bonus. That would make your £4,000 deposit into £5,000 in investable cash.

I have done this for the current financial year. But if I don’t – and if I have room in the £20,000 ISA limit – I will look to do it straight away.

With an extra £1,000 to invest, the next task is to figure out what to buy. Dividend stocks can be a great source of passive income, but which ones should you buy?

Create a portfolio

In general, I like to build a diversified stock portfolio. While it is impossible to eliminate risk entirely when it comes to investing, I think this helps limit the danger of losing money.

Diversification is not just about investing in many companies. A portfolio with 25 oil investments may be less diversified than one with eight stocks from five different sectors.

I also think it is important for income investors to maintain a long-term focus. This can mean buying stocks that aren’t producing great returns now, but will in the future.

With high-yielding stocks, it’s important to determine whether or not the dividends will last. If not, something with a lower dividend yield that grows quickly may be better in the long run.

Stocks to buy

So, which stocks should I buy to create a diversified passive income portfolio today? Four stood out to me at the moment, two from the UK and two from the US.

In England, I see diploma and Major Health Properties. The former is a distributor of specialist industrial components and the latter is a healthcare landlord.

Across the pond, renewable energy companies NextEra Energy and packaged food business Kraft Heinz it’s catching my eye. Together, I think these can form a diversified investment portfolio.

Nothing is without risk. A recession can inhibit the growth of Diploma; regulation could reduce NextEra’s profits; interest rate increases can be considered in Primary Health Properties; and increased competition could be a headwind for Kraft Heinz.

However, by having them all, I hope to limit the risks associated with any one of them. And over time, I think each can grow into a significant source of passive income.

Investment

With £4,000 to invest, I’d put £1,000 into each of the stocks I’ve mentioned here. And I will use the extra £1,000 LISA bonus for an extra £250 each.

From there, it’s about adding to my holdings regularly. Reinvesting the dividends I receive in the short term should help me build something substantial over time.