3 crucial factors for building my passive income

Ken Hall wants to build a passive income that can set him up for years to come. Here are three key things he’s identified to make that happen.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Building a substantial passive income can be hard work. While I dream of retiring and living off my UK shares, it isn’t an easy objective to achieve.

There are many things I need to think about to achieve my goal of living comfortably from my investments in future. I’ve picked out three of the top points I think will be crucial to my success (or otherwise).

Savings discipline

Before I start building a substantial passive income I need to have some money to invest in the first place. I think the foundation of my investment dream comes from savings discipline.

When I calculate my potential passive income in the future, one of the biggest factors is how much I have to invest on a regular basis. For instance, if I assume a 7% annual return and invested £20 each week, I could have a portfolio worth £105,628 in 30 years’ time.

Let’s change that to £100 per week invested. With that same rate of return and timeline, I could instead be sitting on £528,139 worth of investments in 30 years. That’s a huge difference that’s driven by savings discipline and sticking to my goals for the long run.

Dividend shares

Another big factor in achieving my passive income dreams is the investments themselves. I believe in a Foolish long-term perspective and am always looking for strong UK shares that tick my boxes.

For instance, I’m a big believer in dividend shares. This is especially the case for my passive income goals as I do like the regular payout and ability to reinvest versus uncertainty of future capital growth.

Of course, there’s uncertainty with dividends. Companies do change dividend policies and that’s almost guaranteed over my long-term time horizon. However, there are some companies with tasty dividend yields on offer.

Take the likes of Legal & General (LSE: LGEN). This is a blue-chip insurer and asset manager in the FTSE 100 with a £13bn market cap and 9.3% dividend yield right now.

The company has strong brand awareness (we all know the coloured umbrella) and the potential to grow its total assets in the lucrative UK retirement policy market. I think it’s certainly one for dividend-hungry investors to consider if it can maintain that yield.

Now, it’s not all smooth sailing with investing. The Legal & General share price has been under pressure recently including a 12% fall in the last six months. A slight dip in profit after tax and broader share market volatility have been the main drivers with no disastrous news in recent months.

While Legal & General isn’t top of my buy list, it does show there are some serious dividend payers on the market that can help me achieve my dream. Ultimately, investing in a portfolio of dividend shares that can regularly deliver me a passive income stream is the goal for me.

Diversification

Diversification is the final piece of my puzzle. I don’t want to put all of my passive income hopes and dreams in the hands of one stock.

For me, a shares portfolio that can deliver a steady yield through the cycle is the key to achieving my long-term dream. A good mix of stocks that can weather a recession and are leaders in a variety of industries could help me achieve my goals.

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.

Ken Hall has no position in any of the shares mentioned. 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.

More on Dividend Shares

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Dividend yields of up to 11%! Here are 3 UK passive income stocks to consider

Searching for ways to supercharge your passive income with UK dividend stocks? Here are three that have grabbed our writer's…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Here’s how a stock market crash could help an investor retire years early

A stock market crash can be alarming -- but for the well-prepared investor, it can also be an exceptional opportunity…

Read more »

Investing Articles

Hunting for passive income? These falling insurance giants offer 10% yields

The UK insurance sector is typically a good place to look for attractive dividend yields. Dr James Fox details two…

Read more »

Investing Articles

I asked ChatGPT for the best safe havens in the FTSE 100 amid Trump’s tariffs 

Our writer isn't convinced by the answers that AI assistant ChatGPT rattled off when asked about solid FTSE 100 defensive…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Consider targeting £8,840 of annual passive income from 363 shares in this FTSE 100 heavyweight stock!

Investing in high-dividend-paying stocks with the returns used to buy more of the shares can generate potentially life-changing passive income…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

Up 5% in the last crazy week! Are these 2 income stocks the ultimate FTSE defensive plays?

Harvey Jones picks out two FTSE 100 dividend income stocks that have actually climbed while stock markets are heading in…

Read more »

Investing Articles

2 strong FTSE 100 dividend shares to consider as recessionary risks increase

Looking for secure passive income stocks to consider buying as thumping trade tariffs loom? Here are two FTSE 100 dividend…

Read more »

Investing Articles

Income of almost 12%! 3 stunning FTSE dividend stocks now have double-digit yields

Harvey Jones is amazed by the sky-high income on offer from these FTSE 100 dividend stocks, but he's also aware…

Read more »