I’m a huge fan of earning money by doing nothing, even while I sleep. Therefore, I have a solid strategy to build up my family’s passive income over time.
Passive income is earnings that come other than from working. Obviously, some forms of income require effort, such as managing and letting out properties. Other sources — such as putting money in savings accounts to earn interest — are more of a ‘fire and forget’ option.
However, I don’t keep large sums on deposit, because I know no-one who got rich going down this road. Instead, my family earns some passive income from bonds: fixed-interest IOUs (debts) issued by governments and corporations. Rather than buy individual bonds, we invest in bond funds to spread our risk around.
My favourite form of income
My preferred passive income is share dividends. These are cash amounts paid to shareholders by some — but not all — companies. In the US, businesses generally prefer to reinvest their profits into future growth, Thus, American dividend yields tend to be much lower than those from UK shares.
Then again, dividend investing is not a guaranteed route to riches. Future dividends are not guaranteed, so they can be cut or cancelled at short notice. This happened during the Covid-19 crisis of 2020/21. Also, while most UK shares don’t pay dividends, the majority of blue-chip FTSE 100 stocks do.
In addition, when looking for high-yielding dividend shares, I am wary of two things. First, companies whose dividends don’t rise over time. For me, this can be a signal of future problems to come. Second, shares with very high cash yields — say, 10%+ a year — are typically much riskier than those offering more modest payouts.
8.4% a year from a great British business
One of my family portfolio’s highest-yielding shares is household name Legal & General Group (LSE: LGEN), widely known as L&G.
Founded in 1836, L&G is one of the UK’s biggest providers of life assurance, pensions and investment products. It is also one of Europe’s biggest asset managers, managing around £1.1trn for institutional and individual customers.
When asset prices are high and rising, managing other people’s money can be highly lucrative. Indeed, L&G aims to return two-fifths (40%) of its market value to shareholders over three years via dividends and share buybacks.
In 2014, L&G’s yearly dividend was 11.25p a share. By 2024, this payout had leapt to 21.36p — a rise of 89.9%. Today, with the share price at 254.2p, the dividend yield is a market-beating 8.4% a year. Over one year, the shares are up 15.8%, while they have risen 11.9% over five years.
Summing up, L&G stock is an ideal share for my family’s value/dividend/income investing strategy. However, the shares are highly likely to suffer in the next market downturn or full-on stock-market crash. And when financial markets struggle, L&G’s profits and cash flow could be hit. Even so, we intend to be shareholders for the long run!
