Passive income’s often linked to side hustles or far-fetched schemes like solar farm leasing. But I know a much simpler, more accessible way to generate it – one that actually works and fits the definition perfectly. It’s passive because it requires little effort, and it’s income because it starts flowing almost immediately.
I’m talking about investing in FTSE 100 companies with regular earnings, loyal customers, proven business models and a history of paying high and rising dividends.
FTSE 100 companies work for me
This isn’t risk-free. Share prices can fluctuate and dividends aren’t guaranteed. But I offset these risks by diversifying across a spread of companies.
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An investor with £10,000 – or even just £500 – can make a great start. Dividends should begin rolling in soon and, given time, compound to grow further.
My calculations suggest £10,000 in UK blue-chips could eventually yield more than £400 annually in passive income.
But there’s a catch. This won’t happen overnight. Investing is a long-term process. While the effort’s minimal after the initial stock selection, patience is essential.
Did I mention the income’s tax-free? By using a Stocks and Shares ISA, there’s no income tax on dividends and no capital gains tax on share price growth for life.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Even the most reliable UK companies carry risks. Profits can decline, competitors can disrupt markets and regulations can shift. To manage this, a wise investor might split £10k evenly across five shares, known as diversification.
I avoid chasing the highest-yielding shares blindly. For example, telecoms giant Vodafone offered a tempting 10% yield, but its dividend will be cut in half shortly.
By contrast, FTSE 100-listed Imperial Brands (LSE: IMB) has a trailing yield of 5.88% and this looks more sustainable. A £2,000 investment in Imperial Brands would have delivered £118 in dividends. That’s just in the first year.
Imperial Brands has a mighty dividend
Reinvesting those dividends buys more shares, creating a virtuous cycle of compounding growth. Imperial Brands also rewards investors with share buybacks. On 8 October, it announced plans to repurchase up to £1.25bn of shares by October 2025.
Even better, its share price has risen 40% in the past year, delivering capital growth alongside dividends. However, there’s risk. Smoking’s a declining business. While smokeless alternatives could help, they might face regulatory hurdles too.
I personally avoid tobacco stocks, but if I didn’t then Imperial Brands would be on my shopping list.
Let’s say an investor built a diversified portfolio of dividend growth stocks delivering an average total return of 8% annually, including reinvested dividends. In the first year, their £10,000 investment would generate £800.
Over 30 years, that £10k could grow to £100,626, assuming the same 8% average compound growth. At that point, withdrawing 5% annually would yield £420 a month.
The earlier an investor taps into the income, the less they’ll earn. But the longer they stay invested, the greater the rewards. And with minimal effort.
