For years, I have been working to generate a passive income from a portfolio of FTSE 100 shares, plus a few investment trusts. I really like the idea of having an income that I don’t have to work for, to set alongside the one I actively have.
So I’m delighted to see the world’s most famous investor Warren Buffett was highlighting this option long before it ever occurred to me. I thought I knew most of his famous quotes, but this one bypassed me until just a few days ago: “Never depend on a single income. Make an investment to create a second source.”
I’m actively building a passive income
As a freelance writer, I apply this principle to my active and passive sources of income. First, I don’t like to rely on a single source of work, but I write for several different newspapers, magazines and websites. That way if one of them fails, or stops using me, my entire income won’t dry up overnight.
Similarly, I would never invest in only one company stock. There are no guarantees investing. Even big established companies can plunge in value, suspend their dividends, or simply go bust.
I limit the potential damage by investing in a portfolio of a minimum 12 stocks, and I’m looking to increase that to 15. Also, I spread my money across different sectors, and different companies within most sectors.
Investing is cyclical, and different companies, sectors, themes and regions swing in and out of favour. By having a spread of stocks across the banking, mining, healthcare, utility, energy, property and technology sectors, I limit the potential damage.
Most of the FTSE 100 companies I buy are dividend stocks. Growth is fine, but I mostly like to generate passive from my portfolio as well. I don’t touch that income at the moment, but re-invest every single shareholder payout right back into my portfolio. That way I passively buy more and more stock, year after year, without having to lift a finger.
With luck, my portfolio should compound and grow over the decades, until I finally retire and start drawing a passive income from it.
Dividends will fund my retirement
Right now, I’m working hard to top up my portfolio. The FTSE 100 is full of dividend income shares trading at low, low valuations. Many currently yield 6%, 7% or 8%, and in some cases a lot more. Re-investing high dividends like these will really turbocharge my portfolio, by picking up even more stock at today’s low prices.
When markets recover, as they will at some point (just don’t ask me when), I should find myself nicely ahead. I will hold more stock as a result of my current spree, which will generate more passive income, which I will automatically reinvest in a virtuous circle.
My investment income is not large enough to live off yet (and I’m too young to retire anyway). In another 15 years or so, I’m hoping the passive income I generate from dividends will slowly replace my active income as I ease into retirement.