How I’d try to generate passive income for life

This Fool outlines the passive income strategy he is planning to use to generate a steady income from stocks and shares for life.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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I am looking to generate a passive income for life with stocks and shares. I can use many different assets to generate a passive income but, all things considered, I believe equities offer the best choice. 

Passive income strategy

There are a couple of reasons for this. It is easier for me to diversify my portfolio with equities. I can invest in companies worldwide and I do not have to worry about managing the underlying businesses. 

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Other income strategies, such as buy-to-let property, involve far more work. It is also much harder to build a diversified portfolio of properties than to build a diversified portfolio of equities. 

That does not mean it is easy to build a portfolio of equities to generate income. Dividend income from stocks is never guaranteed. A firm can cut a payout at a moment’s notice. 

So I am using a very cautious approach for selecting income stocks. Rather than focusing on yield alone, I am looking for the market’s best growth stocks, as well as income champions. 

Indeed, I believe that businesses with growth potential will be better income investments in the long run. As these companies expand their earnings, they should be able to increase their dividends to investors. Therefore, my dividend income from these shareholdings should develop over the long run. 

Growth and income stocks

Two examples of the sorts of companies I would like to include in my passive income portfolio include distribution and marketing group DCC and generic pharmaceutical producer Hikma

These businesses hardly offer the best deals on the market at the moment. They yield 2.7% and 2% respectively. Still, they are dividend growth champions. For example, Hikma’s per-share dividend has grown at a compound annual rate of 10% over the past six years.

The company invests heavily in developing new treatments and tackling new markets. This has translated into net profit growth. And the corporation has increased its dividend to shareholders as a result. 

DCC has copied a similar model, using acquisitions to complement organic growth. Its dividend has grown at a compound annual rate of 12% since 2016. 

Despite their track records, there is no guarantee either one of these companies will maintain their growth focus as we advance. Any number of challenges from rising prices to competition could hold back growth. Still, considering their potential, I would be happy to add both to my passive income portfolio. 

As well as these corporations, I would also look to add businesses with large stable markets and strong balance sheets to my income portfolio. Direct Line is a great example. The stock currently supports a dividend yield of around 8%.

In fact, I already own this company in my portfolio and would be happy to buy more as it continues to expand its presence in the UK insurance market. 

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Rupert Hargreaves owns Direct Line Insurance. The Motley Fool UK has recommended Hikma Pharmaceuticals. 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.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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