Happy Wednesday! Welcome to the last day of the 2022/23 tax year. As the tax year rolls over into 2023/24 tomorrow, I thought I’d use this milestone to discuss passive income.
Passive income comes from activities other than work. It is found in many forms and includes, for example, savings interest, bond interest, rental income, work and state pensions, and so on.
My favourite form of passive income
My hero, investing genius Warren Buffett, once warned, “If you don’t find a way to make money while you sleep, you will work until you die”.
Following these wise words, my investing strategy is built around generating increasing income to support me and my family for the long term. Also, I aim to get richer along the way, so I buy shares for their future capital gains (profits from selling shares at higher prices).
Therefore, my #1 form of unearned income is the cash dividends paid by companies to shareholders. Alas, not all UK-listed companies pay out dividends — but most members of the elite FTSE 100 index do.
The big problem with dividends
Now for some bad news. Not only do many companies not pay dividends, but future cash payouts are neither certain nor guaranteed.
Indeed, during hard times and downturns, businesses will cut or cancel these payments to preserve cash. Most recently, scores of firms scrapped or reduced their dividends during 2020/21’s ‘pandemic panic’.
Building a high-yield portfolio
So how do I build stable and growing passive income from share dividends? I manage my risk by spreading my money around, to avoid having too many eggs in one company’s basket.
For instance, since mid-2022, my wife and I have been building a new portfolio to generate extra income (and gains) for us. In the second half of last year, we bought 17 different shares to pursue this goal.
However, investing for income is not a one-time, ‘fire and forget’ strategy. Instead, it’s a dynamic process, where we continue to buy more undervalued and high-yielding stocks.
Also, investing is like gardening — we must grow our flowers and pull up our weeds. If we sat back and did nothing, then our portfolio might stagnate and even decline in value. That’s why I’m always seeking cheap, inexpensive, and undervalued dividend shares to buy for the long game.
By the way, our latest purchases have include shares in two Big Four UK banks, a leading UK asset manager, a major European telecoms group, a global mega-miner, and two well-known insurers.
One cheap and easy way to invest
Summing up, by investing across a wide range of companies and industries, we hope to create a stable and growing source of passive income to support us for life.
However, if I didn’t want to pick stocks myself, then I could let ‘Mr Market’ do the work for me. Indeed, my wife has invested large sums in low-cost index-tracking funds to capture the ongoing returns from, say, UK shares and US stocks.
And by investing in hundreds or even thousands of companies with a few clicks, my wife sleeps easier knowing her money is working hard day and night!
