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.
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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.
