Passive income is an investor’s dream. I can buy dividend shares, create extra cash outside of my main source of income, and do very little work to achieve it.
That may seem too good to be true. But it’s not. I’m already doing it. Most of the shares I own provide a dividend. I’m sure lots of my future investments will too.
A recent report from the Pensions and Lifetime Savings Association stated that a single person would need £14,400 a year for a minimum income in retirement. For a comfortable retirement, that figure rises to £43,100.
By relying on passive income, I plan to retire early. Here’s how I’m setting out to achieve it.
Targeting the UK
Firstly, I’m buying UK shares. I largely target either the FTSE 100 or FTSE 250. The reason for this is because they offer meaty yields. I also think these companies look undervalued at present.
I can see why investors have fallen out of love with UK shares. In the last decade, they’ve failed to deliver. However, I think now they look too cheap to ignore. In the years to come, I’m also expecting fast growth in the UK economy. Many have it placed to be the best-performing in Europe in the next 10-15 years.
Taking my time
I’m also utilising the power of time. The longer I have my money tied up in the stock market, the better chance I have of building a nest egg that’ll allow me to retire earlier.
By leaving my money invested for longer, and by reinvesting my dividends, I can further benefit from compounding. This means that I’ll earn interest on my investments as well as the extra money I make, which will also help me grow my pot faster. When the day comes, I can then draw money out as a salary.
How I’m going about it
But what sort of companies should I own? Well, ones such as Legal & General (LSE: LGEN). The insurance giant has been a mainstay in my portfolio. So far, I’ve generated an 11.1% return. However, I’m more attracted by the extra cash I can make on the side.
The stock yields an impressive 8%. What’s more, it has bumped its dividend for the last 9 out of 10 years.
As part of its latest scheme, which finishes this year, it’s set to return up to nearly £6bn to shareholders via dividends. Of course, I must note here that dividends are never guaranteed.
The stock has endured volatility in the last 18 months or so. The challenging macroeconomic environment has placed pressure on the business. As such, it has seen the total amount of assets it has under management drop. As the cost-of-living crisis ensues, this may remain a problem.
However, I plan to own Legal & General for decades. Therefore, short-term issues such as these aren’t a big deal to me. Taking into consideration factors such as ageing demographic, I think the business is in a strong position to grow in the years ahead.
At its current price, I think it’s a steal. The meaty yield it provides is a bonus too. It’s stocks like Legal & General that’ll help me give up work as early as possible.
