Passive income continues to be one of the most popular subjects people want to learn about — and that’s among all ages.
It’s easy to understand why. The idea of cash quietly rolling in while you’re asleep, on holiday, or watching Netflix sounds far more appealing than endlessly swapping time for money.
But there’s a catch. Truly passive income rarely starts off passive. Usually, there’s the upfront investment of either time or money (often both), and the income isn’t ultimately guranteed.
Still, over the years, I’ve researched (which took time) and gradually bought (money) a number of income-paying stocks that now require very little day-to-day effort on my part. They’re nowhere near making me retirement money yet, but they’re steadily doing their thing in the background.
Want to know which dividend shares are paying me tax-free passive income streams while I sleep? Read on and I’ll tell you, including one of my favourites right now.
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.
What are dividends?
Through dividend-paying shares, investors can aim to receive regular cash payments simply for holding the company’s stock. Even better, many UK shares currently offer dividend yields way above the interest rates available on savings accounts.
In 2026, companies in the FTSE 100 are expected to dish out a record £88bn in dividends to shareholders, according to investing platform AJ Bell. If so, that would beat last year’s total.
Naturally, dividends are never guaranteed, as companies can cut them during tough periods. Today, the war in Iran is certainly adding a fair amount of uncertainty and risk.
Still, I love the long-term potential because dividends can compound over time. Reinvesting those payouts into more shares can gradually create a snowball effect in my portfolio. That’s the aim.
A £750,000 portfolio that eventually yields 9%, through dividend growth and reinvestments, would generate £67,500 a year in income.
High-yielders
Now, I should point out that not all of my portfolio is focused on passive income. Today, I hold quite a few growth stocks that pay little or no income.
However, a handful of the shares I do hold (in the table below) offer very chunky dividend yields.
| Forward dividend yield | |
|---|---|
| Aviva | 6.8% |
| Legal & General | 8.9% |
| HSBC (LSE:HSBA) | 5% |
| LondonMetric Property | 6.9% |
Note, the first three of these are due to pay dividends within the next two months. And because they’re held in my Stocks and Shares ISA, the income will be tax-free.
Which is my favourite?
Obviously, I like all four of these shares, but my favourite right now is HSBC. The banking giant reported earnings earlier this week, sending the share price down 5%. Coincidentally, this puts the forward dividend yield at about 5%.
However, the quarter looked resilient, with underlying revenue rising 4% to $19.1bn and pre-tax profits stable at $10.1bn. There was strong growth in its wealth management division, which has been a key focus for the Asia-focused lender.
While the Middle East situation adds near-term risk and is clearly holding back growth, full-year guidance was maintained.
But it’s the longer-term growth across Asia that appeals to me as a shareholder. With a massive presence in Hong Kong, HSBC is positioned as a bridge for capital flowing in and out of mainland China. Then there are long-term growth opportunities in India.
HSBC stock’s trading at a reasonable 10 times forward earnings, so doesn’t look overvalued. I think it’s worth considering for passive income.
