These cheap shares are a great source of passive income!

In my search for £50,000+ a year in passive income, I have been busily buying cheap UK shares. And these six shares pay bumper dividends!

Passive income text with pin graph chart on business table

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As an older investor, my strategy for getting richer has evolved considerably. In my youth, I placed far too many ‘moonshot’ bets that crashed to earth. These days, my goal is grow my passive income so I have more than I need to retire comfortably.

Patient, powerful passive income

There are dozens of ways to generate extra unearned income. For example, I could keep cash in a savings account. Alas, I know no-one who got rich with 100% in cash, so this isn’t for me.

Another alternative is the regular income from the coupons (interest) paid by bonds (government and corporate debt). Or I could become a buy-to-let landlord, renting out property to tenants. But this sounds too much like hard work.

For me, the best source of long-term, rising passive income is share dividends. These regular cash distributions are paid by companies to shareholders. And after 37 years of investing, my family’s dividends have grown exponentially.

The problem with dividends

Dividends are the closest thing to free money I’ve ever collected, but are not necessarily a one-way ticket to great wealth.

One problem is that not all London-listed companies pay dividends. In fact, the vast majority don’t, often because they are loss-making or reinvest their profits into future growth. Yet almost all members of the FTSE 100 index pay out cash to shareholders.

My second setback is that future dividends are not guaranteed, so they can be cut or cancelled at any time. Indeed, during the Covid-19 crisis of 2020/21, dozens of FTSE 350 companies slashed or withdrew their payouts.

Delicious dividends from on-sale stocks

Right now, my wife and I own a total of 22 UK stocks, almost all of which we bought in 2022/23 for their ability to generate powerful passive income. What’s more, six of these shares are among the 10 highest-yielding FTSE 100 stocks. Here are our six ‘dividend dynamos’:

CompanySectorShare priceOne-year changeFive-year changeDividend yield
Phoenix Group HoldingsFinancial465.37p-15.6%-25.6%11.2%
Vodafone GroupTelecoms77.22p-25.8%-46.4%10.1%
M&GFinancial204.8p+15.2%N/A9.7%
Legal & General GroupFinancial222.7p-5.8%-14.9%8.8%
GlencoreMining430.65p-15.6%+41.7%8.1%
AvivaFinancial406.9p-4.6%-28.7%7.8%

Note that several of these high-yielding stocks have fallen over one or five years. However, we bought our holdings after these sustained price falls. After all, when share prices fall and dividends don’t, then dividend yields rise.

Across these six shares, cash yields range from nearly 8% to over 11% a year. That’s far in excess of the 5%+ I could earn in a table-topping savings account. However, shares are far risky than cash deposits, which can be guaranteed up to 100% by HM Government.

Which of these high-yielders would I buy now?

As I have no investable cash to spare at present, I won’t be buying any of these high-yielding stocks this month. Also, my wife and I already own all six, so I see no need to add to our existing holdings.

Nevertheless, if I were forced to buy more of all six companies today, I would go ahead. Then, while I waited for share prices to recover, I’d gladly bank this delicious passive income!

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.

Cliff D’Arcy has an economic interest in all the shares mentioned above. The Motley Fool UK has recommended M&G and Vodafone Group. 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.

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