Habitual Fool readers may know that I’m a keen cheerleader for passive income. What is passive income? It’s money that rolls in without working for it — the lazy (or smart) person’s dream.
There are dozens of ways to gain unearned income. For example, savers earn interest on deposits, landlords collect rent from tenants, and pensioners gather retirement income from governments, former employers and investment pots.
But what’s my favourite form of passive income?
Delightful dividends
By far my preferred form of unearned income is share dividends. These regular cash payments are made by companies to their owners (that is, their shareholders). When I buy shares, I’m not buying lottery tickets — I’m buying part-ownership of businesses. When those companies do well, they can reinvest their profits to boost future growth, or return them to me via dividends.
That said, share dividends are not a sure route to riches. First, most UK-listed companies don’t pay dividends, although most FTSE 100 firms do. Second, future dividends aren’t guaranteed, so they can be cut or cancelled at short notice. Third, even good businesses drop their dividends during tough years, as happened in the 2020/21 Covid-19 crisis.
Three dividend dynamos
Currently, my family portfolio includes at least 25 FTSE 100 and FTSE 250 shares to diversify our dividend income. These stocks also add balance and ballast to our portfolio during the market’s occasional meltdowns.
Here are three shares we own for their powerful, market-beating passive income:
| Company | Share price | Market value | Dividend yield |
| Legal & General Group (LSE:LGEN) | 274.1p | £15.7bn | 7.8% |
| Phoenix Group Holdings | 756.5p | £7.6bn | 7.2% |
| M&G | 317.8p | £7.7bn | 6.4% |
Across these three dividend dynamos, their average dividend yield exceeds 7.1% a year. That’s way ahead of the Footsie’s cash yield of around 3% a year, because these three are among the London market’s highest-yielding shares.
Lovely L&G
While working in the insurance and investment world for 15 years, I became a big fan of the management and business of Legal & General Group. Founded in London in 1836, L&G is a stalwart of the FTSE 100. It’s also one of Europe’s biggest asset managers, administering over £1.1trn for individual and institutional clients.
Financial markets have boomed since late 2022, delivering bumper profits to L&G. Hence, it has raised its dividend from 13.4p a share in 2015 to 21.36p in 2024. That’s a leap of 59.4% in nine years — and it’s supported by L&G’s high Solvency II capital ratio, strong balance sheet, and cash generation.
Then again, as with all asset managers, L&G’s fortunes are closely tied to the stock and bond markets. The next stock-market crash is coming. The only question is when. And falling asset prices will undoubtedly hit L&G’s revenues, profits and cash flow.
Now for one final twist: my wife and I don’t even collect the copious cash these and our other stocks generate. Instead, we reinvest our dividends into buying even more shares. This increases our company ownership and should lift our long-term returns. And even after we retire, we will continue investing in dividend stocks for the long run!
