There are all sorts of ways of earning a passive income. Renting out property, generating royalties, or earning interest from lending money are some examples. But I reckon the easiest way is to invest in the stock market with a view to building a portfolio of dividend shares.
However, without a large lump sum to invest, it’s easy to be put off. After all, a 9.46% annual return – the average of the FTSE 100 from 2016-2025 – on £100 isn’t a life-changing sum of money. But I reckon by sacrificing a cup of coffee each day and buying a few shares instead, it’s possible to achieve some amazing results. Let’s see.
Patience and discipline
Rather than invest £5 every day (fees are likely to wipe out most of the benefit) it would be better to set aside £150 a month. Assuming a 9.46% return every year, this would grow to £812,046 after 40 years. That’s a 1,028% return on the £72,000 invested.
| Period | Capital invested (£) | Portfolio value (£) |
|---|---|---|
| 10 | 18,000 | 30,029 |
| 20 | 36,000 | 107,079 |
| 30 | 54,000 | 304,778 |
| 40 | 72,000 | 812,046 |
The 9.46% return of the Footsie was achieved from a mixture of growth shares and dividend stocks, and assumes that all payouts were reinvested – a process known as compounding.
Of course, it might not be possible to achieve such a high growth rate every year for four decades. But history suggests there’s a good chance the UK stock market will grow over the long term. And even if we reduced the growth rate to 5% in our example, it would still give an investment pot worth £401,965 after 40 years.
At the moment (30 January), the FTSE 100’s yielding 3.1%, which suggests around a third of the total annual rate of return comes from dividend shares. But there are plenty of stocks offering a better yield than this.
Bricks and mortar
For example, based on amounts paid over the past 12 months, the return on Land Securities Group (LSE:LAND) is currently 6.4%. Returning to our example, this could generate an annual passive income of £51,971 on our portfolio of £812,046. And there would be no need to touch the capital.
Although it’s important to remember that dividends can be erratic, the group — which has a £10.8bn portfolio comprising mainly offices and shopping centres — has been steadily raising its payout since the pandemic.
Combined with an occupancy rate of 97.7%, it seems to have successfully addressed concerns that working-from-home and internet shopping are going to change the property landscape forever.
But the group’s not resting on its laurels. With a view to achieving higher income growth rates, it’s currently moving away from offices towards residential properties. This should also help reduce its exposure to the commercial property sector, which is notoriously cyclical.
At nearly nine times EBITDA, it must be said that Land Securities’ borrowings are on the high side, although a loan-to-value of 40.3% suggests there’s plenty of headroom. Impressively, its desirable portfolio means it was able to achieve a 10% uplift on re-lettings and renewals during the six months to 30 September 2025.
On balance, I think Land Securities is a stock to consider.
Having said that, it would be a bad idea to invest in just one stock. By building a diversified portfolio of high-yielding dividend shares, it’s possible to generate healthy levels of passive income, all from sacrificing a cup of coffee every day.
