There are many ways to generate passive income out there, but I want one that needs the minimum work from me. That means putting some money into UK shares that pay regular dividends. And if I go for a long-term investment in high-quality companies, I can just sit back and watch the cash rolling in.
Well, that’s the idea. And I reckon Shell (LSE: SHEL) could be one of the stocks to help turn it into reality.
The share price
The Shell share price has been gaining ground in the past few years. And I think that’s because the biggest risk facing the oil and gas sector’s receding.
I’m talking about the shift away from fossil fuels and to renewable alternatives. That’s surely going to happen, and it remains a risk. But it’s looking increasingly like the switch could take a lot longer than investors had been fearing.
In fact, some analysts even think oil demand will keep on rising at least into the mid-2030s. And even then, the big oil firms have a great incentive, the financial means, and the expertise to lead the shift to other sources.
And as long as there’s oil coming out of the ground, I just can’t see such a rich energy source being left to waste. There are cleaner ways to use it than just burning it.
The dividend
Right now, forecasts suggest a 4% dividend yield from Shell shares. And that’s not the biggest on the FTSE 100, not by a long way.
But I’d say it has a few things going for it. Firstly, it’s well above our long-term inflation goals. And passive income in real terms really seems like money for nothing to me.
Well, I have to stump up some cash first. And I do take the risk that the dividend might not keep going. No dividends are ever guaranteed.
But if I look a little way ahead, I see something that I like a lot. Analysts expect Shell dividends to grow by 18.5% between 2023 and 2026. And long-term progressive dividends can add up to a lot more cash than a bigger yield today that’s not sustainable.
That would push the effective dividend yield for 2026 up to 4.4% based on today’s Shell share price. And hopefully higher in the years ahead.
That’s where long-term investing really pays off. When a dividend grows over the years, we get a bigger and bigger yield on what we actually paid in the early years.
How many shares?
Using that 4.4% yield, I reckon I’d need around £54,500 invested in Shell shares today. That’s a little over 2,000 shares. It’s not a small amount, for sure. But I work out that I could build up to it with £220 a month for 15 years, with dividend cash reinvested. And then it’s all income.
But if I had that £50k to spare right now, I’d almost certainly put a chunk of it into Shell shares. As part of a diversified portolio, to spread the risk.
