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.

pensive bearded business man sitting on chair looking out of the window

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

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. 

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. 

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 assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »