I’d like to have a larger income, but I’d rather not work hard to earn it. Hence, my favourite way of earning extra money is through passive income. And the best thing about passive income is that it rolls in when I’m not working — and even while I sleep.
Regular earnings through passive income
My investment hero Warren Buffett once remarked: “If you don’t find a way to make money while you sleep, you will work until you die.” Happily, I’ve discovered a simple way to generate both passive income and capital gains through the same strategy.
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In the past, I used a mix of cash deposits, fixed-income bonds and other interest-earning assets to generate passive income. But since the global financial crisis of 2007-09, global interest rates have been slashed close to zero. This made it increasingly tough for me to generate decent income from these assets.
I rely on dividends for passive income
Today, I rely almost exclusively on the cheap shares of quality companies to generate passive income for me. To generate these earnings, I simply buy stocks that pay market-beating cash dividends. Dividends are regular cash amounts paid to shareholders, typically half-yearly or quarterly.
But the first problem with dividends is that they’re not guaranteed, so they can be cut or cancelled at any time. And the second problem is that most London-listed companies don’t pay dividends. Fortunately, the FTSE 100 index is packed with great businesses that pay decent dividends to patient investors. And when these Footsie firms do well, they often boost their dividends, producing even more passive income for me.
Seven FTSE 100 dividend dynamos
A quick sift through the FTSE 100 revealed more than 90 companies that currently pay regular dividends. And these seven shares below offer some of the highest UK dividend yields:
|Company||Sector||Share price (p)||One-year change||Dividend yield|
|Legal & General||Financial||254.83||-9.7%||7.0%|
As you can see, cash yields from these seven FTSE 100 shares range from 7% to over 11% a year. That’s a big multiple of the passive income I could earn in savings accounts. But that’s because shares are far riskier than cash deposits, as share prices can go down as well as up.
The average dividend yield on offer from these seven shares comes to almost 8.9% a year. That’s a huge passive income that I’d happily grab today. Hence, though I don’t own any of these stocks right now, I’d gladly buy them to boost my future income.
This is not a proper portfolio
However, I wouldn’t ‘bet the farm’ on these seven shares. A mini-portfolio of just seven stocks would be very concentrated and not diversified enough. They all come with risks. Also, four of these seven shares are in the insurance/investment sector, which makes for even greater concentration risk. But if you told me to buy these shares today, I’d do so purely for their generous passive income!