Dividend shares can be a useful source of passive income. Owning them can help me earn money in the form of dividends. Successful, large FTSE 100 companies with proven business models can often generate more cash than they need to run their business. Such cash flows can fund dividends, in some cases, year after year.
That is not guaranteed, though. Companies may cut their dividends without warning, even if they have been generous payers in the past. So when it comes to trying to earn passive income by investing in shares, the choice of which shares to buy is important.
It is also important not to put all one’s eggs in a single basket. As I already own other shares, though, if I had spare cash to invest I would be happy to buy 19 shares a week of the well-known FTSE 100 share below.
Iconic financial services operator
The firm in question is financial services powerhouse Legal & General (LSE: LGEN).
It operates in an area I expect to keep benefitting from high, enduring demand. Within that field – with its vast revenue potential – Legal & General is able to set itself apart from competitors in a number of ways. It has an iconic logo and brand, large customer base, and long expertise in investment management and pension planning.
All of that adds up to a recipe for success. In recent years, the company has been consistently profitable and cash generative. It has also paid a dividend annually. In fact, the last time the FTSE 100 share’s dividend was cut was after the 2008 financial crisis. It is far higher today than it was then.
Pros and cons
However, all shares carry risks. Legal & General’s profits have fallen over the past couple of years. So have its revenues.
That sort of turbulence is not unusual for financial services firms and at the end of the day earnings are an accounting measure. What matters most for sustaining a dividend is free cash flow — and Legal & General continues to generate plenty of that.
If there is another stock market crash, customers could seek to withdraw funds from Legal & General, hurting revenues and profits. I also think the attractiveness of its business area means a slew of competitors will try to eat its breakfast. Having done business over the course of centuries already, though, I believe the firm is adept at matching its marketing message to the times.
Setting up passive income streams
If I bought 19 shares in this FTSE 100 household name, at the current share price that ought to set me back around £28.50 per week.
After a year, I should own 988 shares. Currently, the Legal & General dividend per share is 20.34p.
So that shareholding would hopefully earn me just over £200 annually in passive income.
