How we’re building passive income of £100k a year

In my search for passive income, I’m always on the lookout for high-yielding shares. Even after rising 16.4% in a year, this stock yields 6.8% a year!

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As an older investor — I was 56 this month — I’ve built a well-diversified, relatively low-risk, and high-yielding family portfolio. All being well, this pot will produce plenty of passive income for retirement.

Potential forms of unearned income

My wife and I hope to replace — or, ideally, exceed — our earned income with passive income by the time we quit working life.

However, we have rejected a number of popular forms of unearned income. For example, we don’t keep huge sums in cash, because history shows this produces inferior returns over many decades.

Also, our portfolio includes no bonds — debt securities (IOUs) issued by governments, companies, and other entities. These pay a fixed rate of interest over a defined period and then return the initial investment on maturity.

Third, we have no interest in becoming buy-to-let (BTL) landlords, letting out property to tenants. I know that this can be expensive (due to maintenance and repairs) and hard work (with tenant disputes).

Replacing our earned income

Our plan to generate powerful passive income for our later years is built on two powerful platforms.

First, we have amassed a collection of pensions, including employer and personal schemes built up over 35+ years. As we are both over 55, we can choose to access these pots at any time. However, we feel it’s best to leave them alone until we actually need them.

Second, as I mentioned earlier, we have built a portfolio of 27 different shares — 15 FTSE 100 shares, five FTSE 250 holdings, and seven US stocks. We bought the majority of these stakes to generate market-beating dividend income.

My best guess is that this twin foundation of pensions and share dividends should produce around £100,000 year of passive income on retirement. When our state pensions kick in at age 67, this will add another £20k a year on top. That’s a decent return from 40+ years of work and long-term investing.

This share pays delicious dividends

By my count, at least 15 of the 20 UK stocks we own generate market-beating dividend income. The Footsie index offers a dividend yield of 4% a year, which is easily beaten by our high-yielding shares.

For instance, take the shares of Aviva (LSE: AV.), one of the UK’s leading insurers and asset managers. This business has been around for over 320 years and today looks after 18.7m clients in the UK, Ireland, and Canada.

We bought into this business in August 2023, paying 398.3p a share for our stake. As I write, Aviva’s share price stands at 493.07p, valuing the group at £13.5bn. Thus, we are sitting on a paper profit of 23.8% of our initial investment.

However, this early gain isn’t why we bought Aviva stock. We own it purely for its high dividend yield. Even after rising 16.4% over one year and 21.6% over five years, this share offers a cash yield of 6.8% a year. That’s 1.7 times the wider index’s yield.

Of course, future dividends are not guaranteed, so they can be cut or cancelled unexpectedly. Also, if Aviva’s revenues, earnings and cash flow fall, then this payout could be at risk. Even so, we intend Aviva to be a core, long-term holding for many years to come!

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 Aviva shares. The Motley Fool UK has no position in any of the shares mentioned. 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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