With bills and mortgages stubbornly high these days, even relatively well-off families seem to need passive income.
Some choose a side hustle, like selling goods on eBay, or taking on part-time work. My neighbours have turned their tiny box room into an Airbnb, for example.
The issue with these options is that they aren’t really passive.
My time is limited, and putting in the incredible effort required to start another business? It’s not cost-effective.
But just as buying great dividend shares can improve my wealth, the good decisions I make today can compound over time.
It’s like Warren Buffett’s partner Charlie Munger famously noted. Long-term investors can build an incredible advantage just by being “not stupid” rather than than trying to be super-intelligent.
Money-making machine
Over the last two decades, the FTSE 100 has given investors average returns of 6.9% per year.
And if I set aside £10 a day set over 10 years, that would give me £36,500 to invest.
WIthout doing anything particularly special, and just making the average 6.9% return? My lump sum could result in £50,270 in passive income over the following 20 years.
It’s important to note that these returns are not guaranteed. They could be higher, or much lower, depending on what I choose to invest in.
Where to look
If I was starting again with my investing, I’d focus my search on the UK’s best businesses and funds.
The first place I’d look is at the businesses that have raised their dividend payouts to investors over decades. For individual stocks, that could be something like FTSE 100 defence firm BAE Systems, which has raised its dividend for the last 24 years in row.
The next place I would look is at the UK’s best performing funds. These buy shares in lots of different companies all over the world and give the returns to their investors.
If I bought £10,000 of Scottish Mortgage Investment Trust (LSE:SMT) shares 10 years ago, I’d be sitting on more than £40,000 today. Shares in the fund have quadrupled in value over that time.
It buys shares in tech and e-commerce giants like Amazon and Nvidia, but it can also take stakes in private companies that aren’t listed on the stock market. That includes Elon Musk’s SpaceX.
Even better than the share price uplift is the fund’s dividend history. It has improved its per-share payout for 41 years in a row!
And this year’s near-15% dividend growth is its best performance since 2007.
As of the end of January 2024, the shares are also trading at a 10%+ discount to the net asset value of the fund. So now may be a good time to consider taking a position.
Summing up
As the person who takes responsibility for investing all of my family’s money, the pressure can be intense.
That’s why building passive income streams makes so much sense.
And I’ll repeat something my dad told me nearly 20 years ago. “If you’re not making money while you sleep, you’ll work until you die.”
It seemed pretty harsh at the time. But it was good advice, and a lesson I hope to pass on, too.
