I’m on the hunt for big passive income. I could even aim for a £24,697 yearly income if I invest in the best world-class shares. That would do for me.
Why UK shares
I’ll explain how I got to that number in just a second. First, let’s look at why UK shares are a great place for passive income right now.
The FTSE 100 might be the best place to start. The average dividend is now far higher than its US or European peers. It’s over double that across the Atlantic.
| Average dividend | |||
| FTSE 100 | S&P 500 | CAC 40 | DAX |
| 3.79% | 1.54% | 2.03% | 2.61% |
The 3.79% above is low though. I’d expect more than that. The reason? That’s an average. It includes lots of growth stocks or other companies that don’t pay out dividends.
The FTSE 100 has 12 stocks that pay over 7% right now. It has 27 that pay over 5%. And that’s not counting the shares possibly rising in value. That’s a lot of passive income potential.
10% might be too high
I think the ‘world-class’ tag is justified. The FTSE 100 isn’t about small British companies that only make their money on these shores. It’s full of global behemoths. About 75% of its constituents’ revenues come from abroad. Their big profits are what will make their way into my account as dividends.
That said, I don’t plan to snap up every big dividend payer either. The top end of the Footsie has 10%+ dividends at the moment. That’s a pretty nice return, true, but it might not be sustainable.
Vodafone, for example, offers a 10.55% dividend. That’s very high. The catch is that the company is paying it with nearly 100% of its earnings. I expect that to come down over the coming years.
I’d use a different approach. I’m still looking for a big payout, but I’m looking for a few key details in my world-class shares.
The best shares for income
One of those is an increasing dividend. A payment that goes up year after year is a great sign, and the more years the better. It signals a well-run company with good cash flows that isn’t over-extending itself.
One stock I might call ‘world-class’ is Legal & General. It offers a generous 8.95% dividend. So that’s a good start. But even better, the payout has gone up every year this century except for two. With a track record like that, I’d expect dividends long into the future.
With stocks like this, I might only buy five to 10 in total. That’s enough to give me a margin of safety through diversification. After all, even the best investors don’t get it right every time.
At the same time, it’s a small number of stocks. This will let me laser-focus on the best ones for passive income.
How I’d try for my income goal
So if I have a portfolio like this, filled with such shares, what income could I expect? Well, let’s assume a 7% return. I’d hope for more, but let’s run with that and see what happens.
I’ll also assume I can save £300 a month. Here’s what that could build to.
| £300 a month | |||
| Savings | Invested with 7% | 7% yearly return | |
| 5 years | £18,000 | £21,480 | £1,504 |
| 10 years | £36,000 | £51,606 | £3,612 |
| 20 years | £72,000 | £153,122 | £10,719 |
| 30 years | £108,000 | £352,819 | £24,697 |
There we go. That’s the £24,697 figure. Although there’s no guarantee I will achieve that amount. Plus a 7% withdrawal is considered on the high end and may deplete my original sum.
I am working towards something like this already. I mentioned Legal & General above. Well, that’s part of my current portfolio. With shares like this, I hope to reach a big second income one day.
