I’m a huge fan of passive income — earnings that come other than from paid work. Types of unearned income include cash interest, bond coupons, rental income, and share dividends.
My favourite passive income is the dividends paid by certain shares to their owners. American tycoon John D Rockefeller once remarked, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” Like Rockefeller, I enjoy banking my dividends, but as just one of my many joys in life.
The joy of stocks
Thanks to a teenage interest in financial markets, I have been investing for almost four decades. Along the way, I discovered one simple way to raise my returns. I collect share dividends, but don’t spend this cash. Instead, I reinvest it into buying more shares.
Of course, there is no guaranteed strategy for stock-market success, as each approach has its merits and drawbacks. But this method — buying shares in good businesses at fair prices and reinvesting their dividends — works for me and my family.
A dividend dynamo
Not all UK-listed shares pay dividends, but most FTSE 100 stocks do. Also, future dividends are not guaranteed and can be cut or cancelled at short notice. Also, companies paying out super-high dividends sometimes suffer as a result of this cash drain.
That said, here’s an example of one high-yielding share in my family portfolio that’s a favourite for producing powerful passive income. The business is Phoenix Group Holdings (LSE: PHNX), which buys, manages, and runs off insurance, pension, and investment portfolios.
Done well, this can be a profitable business. Indeed, Phoenix now administers roughly £290bn of assets for around 12m customers. As I write (16 June), its shares trade at 655p, valuing this group at nearly £6.6bn. Over one year, this FTSE 100 share is up 36.7%, but has gained only 2.3% over five years.
What grabs me about this stock is its powerful passive income. The dividend yield of over 8.2% a year is almost 2.3 times the FTSE 100’s cash yield of 3.6% a year. In fact, it’s one of the highest in the entire London stock market. Indeed, £12,000 invested in Phoenix inside a Stocks and Shares ISA would produce £989 in tax-free passive income this year. Nice.
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.
Having paid 514.9p a share for our holding in Phoenix, we are sitting on a 27.2% paper profit. Then again, this firm operates in a fiercely competitive sector dominated by much larger rivals. Also, falling investment returns, lower fees, or a stock-market crash could hammer Phoenix’s earnings and cash flow. Even so, we have no intention of selling our stake while these juicy dividends keep rolling in!
