What is the easiest way to earn passive income? I do not know the answer to that question. But what I do know is that setting up my own business to try and earn money without working for it seems neither easy nor passive!
Instead, I prefer to sit back and benefit financially from the hard work of others who have already proven their business model.
To do that, I buy shares I think will pay me dividends.
But I am not talking about some below-the-radar businesses relying on luck as much as commercial acumen. No, I mean investing in longstanding blue-chip FTSE 100 shares.
Strong income generator
An example is the pensions specialist Legal & General (LSE: LGEN). This is a household name and its iconic umbrella logo has been around for generations. That helps it attract and retain customers without needing to spend vast sums on marketing campaigns.
Pensions can be a highly profitable line of business. They tend to span decades and can involve large sums of money, creating sizeable opportunities for a provider to generate fees.
Last year, revenue at Legal & General was £13.7bn. The company made a post-tax profit of £2.3bn.
That demonstrates how massively profitable the firm can be. Not only can it make a lot of money, but the shares look cheap. The price-to-earnings ratio at the current share price is around six. That looks very cheap to me for a FTSE 100 company of Legal & General’s quality.
But here is the rub from a passive income perspective. Of that £2.3bn, Legal & General paid out over a billion pounds in dividends to shareholders. Under its current five-year plan, the firm expects to have paid £5.6bn-£5.9bn in dividends by next year.
Things could get even better
That is not guaranteed to happen. Dividends can always be cut by a company and Legal & General did just that following the 2008 financial crisis. For example, one risk I see is choppy financial markets leading to people withdrawing funds from their pensions. That could hurt L&G’s revenues and profits.
If the company can deliver on its plan though, it is expected to raise the annual dividend this year by 5%. Beyond that, the policy has not been announced but the company said it expects to keep raising the payout annually.
Attractive dividend shares
At the moment, the dividend yield is 7.8%. That means if I invest £100 in Legal & General shares today, hopefully it will earn me £7.80 of passive income over the coming year, in the form of dividends.
If, as I expect, the final dividend is increased at the same rate as the interim payout was, the dividend per share this year will be around 20.3p.
I never invest only in one share. But I have other shares in my portfolio and so, if I had spare cash right now, would be happy to buy Legal & General dividend shares too.
If I wanted to target £2,000 of passive income next year by doing that – and maybe more in the years afterwards – I would buy 9,832 of the shares today.
That would cost me under £25,000 and could potentially earn me lifelong annual four-figure passive income streams!
