Retiring is about not working. Passive income is about earning money without working for it. So perhaps the two things go together, as Ol’ Blue Eyes sang, like love and marriage or a horse and carriage?
I think they could. By setting up passive income streams today, I believe I could aim to retire early. I reckon I could do it for just £10 a day. Here is how.
The basics of passive income
So how does this work in practice? To start, I would set up a share-dealing account or Stocks and Shares ISA and begin putting my £10 a day into it (or the equivalent on a weekly or monthly basis). Doing that would give me £3,650 a year to invest in shares.
Imagine I achieved an average dividend yield of 7%, meaning I got £7 each year in dividends for each £100 I invest now. Seven percent of £3,650 is equivalent to around £255 a year of passive income.
If I did that year after year the income would add up. I could put fuel on the fire by reinvesting my dividends rather than taking them out as cash.
Doing that, after 30 years I would hopefully have a share portfolio generating over £24,900 of income each year. Hopefully that would help me retire early compared to if I had just spent the tenner a day year after year rather than investing it.
Hunting for future income stars
But 7% is well above the current average dividend yield for FTSE 100 shares (in fact, over double).
Some FTSE 100 shares currently offer such a yield – quite a few, actually. But a high yield can sometimes signal City fears that a dividend may be cut. No dividend is ever guaranteed to last.
So my starting point in finding shares to buy would be to look for great companies I felt could generate large free cash flows in future to fund dividends. Next I would consider whether the share price was attractive. Only then would I look at yield.
High-yield performer
One high-yield share I think investors should consider buying for its passive income prospects is insurer Phoenix (LSE: PHNX).
It owns some well-known names in the UK insurance and life assurance industry, such as Standard Life. Taken together, those businesses have a customer base equivalent to over one in six people across the nation.
With ongoing high demand, an existing customer base, well-known brands and a proven business model, Phoenix has been a solid income generator in recent years. Indeed, it has increased its dividend per share annually in that period and plans to keep doing so.
Despite those attractions, at the moment the yield is a mouth-watering 10.4%. That is well above my 7% target, so if I owned Phoenix I could start targeting an average 7% yield, even while also owning some lower-yielding shares.
Is the high yield a signal of risk? Phoenix’s mortgage book could have to be written down in value if the property market tanks.
A large, complex insurer like Phoenix inevitably carries a number of risks, but the firm also potentially offers lucrative passive income opportunities.
