June 14, 2024

How to create a ton of passive income with two easy steps

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How great would it be to earn a significant passive income? One that really requires very little effort on our parts, other than buying the right stocks to achieve our goals.

Here, I’m going to explain how UK investors can potentially earn a ton of passive income by following just a couple of simple steps.

Fuel the ISA

UK investors can make use of the Stocks and Shares ISA to grow investments and earn passive income tax-free, with a £20,000 annual limit, flexible investment options, and no minimum holding period.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

However, our ability to earn a passive income depends on the size of our ISA. Many of us will need to let our portfolios grow before we consider investing in dividend stocks and taking our passive income.

So my first step is fuelling the ISA. Consistently contributing to an ISA can significantly enhance its growth over time. Regular contributions, coupled with the power of compounding returns, can lead to substantial long-term wealth accumulation.

So by maximising our contributions according to our objectives, and reinvesting our returns year after year, the growth of our investment portfolios can be effectively accelerated.

Invest wisely

Many novice investors lose money. That’s often because they’re not choosing stocks in a truly impartial manner. Making the right investment decisions is key to building our portfolio into something much larger.

I see a lot of my colleagues talk about investing in dividend stocks and reinvesting dividends as a way of building a portfolio. That’s one way, and it’s worth recognising that the yield should grow over time, which is great.

However, I favour investing in growth-oriented stocks in order to get my portfolio growing. This is often a data-driven approach that relies heavily on earnings projections and the price-to-earnings-to-growth (PEG) ratio.

Also, we don’t need to invest in dividend stocks to practice compound returns. Growth-focused stocks essentially reinvest in their businesses on our behalf, instead of paying a dividend.

Growth-focused stocks

One of these growth-oriented stocks is Celestica (NYSE:CLS). If I had invested in the stock a year ago, today I’d be up 326%. However, I certainly don’t think it’s too late for investors to get involved.

The stock’s currently trading at 16.7 times forward earnings, and this figure’s expected to fall to 15.3x in 2025 and 12.5x in 2026. The PEG ratio sits around 0.9, according to my calculations, which makes its a highly attractive investment opportunity.

I’m wary that, up 326%, some shareholders may be looking to cash in on their gains. However, the value proposition for new investors remains highly attractive.

Celestica designs and manufactures electronics for industries, notably those within the AI/data centre segment, boasting partnerships with tech giants like Dell and Cisco, and many big tech names in its hyperscale division.

Its Connectivity and Cloud Solutions (CCS) segment’s a key player in the booming data centre and cloud service industry, which is experiencing explosive growth. CCS is already a major revenue driver for Celestica, and management expects it to continue leading the charge.

Moreover, with the continued expansion of the AI and data centre industry, Celestica looks set to cash in on more hyperscale revenues.

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