There are a number of ways to generate passive income. Renting out a property is one. Peer-to-peer lending is another. Perhaps the easiest way is by investing in dividend-paying stocks. Dividends are payments that some companies pay their shareholders out of their profits on a regular basis.
Here, I’ll show you how I personally generate passive income with FTSE 100 dividend stocks. I’ll also reveal a simple trick that enables all my passive income to be entirely tax-free.
Generating passive income with FTSE 100 dividend stocks
Currently, I have investments in around 15 different FTSE 100 companies that pay dividends. Some of my largest dividend stock holdings include:
Diageo: an alcoholic beverages company that owns a vast portfolio of top brands including Johnnie Walker, Tanqueray, and Smirnoff
Reckitt Benckiser: a health and hygiene company that owns many trusted brands including Dettol, Nurofen, and Mucinex
Unilever: a leading consumer goods company that owns many well-known brands including Dove, PG tips, and Ben & Jerry’s
Sage: a leading financial technology company that provides accounting and payroll solutions
All of these, and the other FTSE 100 dividend-paying companies I’ve invested in, pay passive income into my investment account on a regular basis.
Regular cash payments
This month, for example, I’ve already received three cash payments from FTSE 100 companies. These were from Unilever, defence giant BAE Systems, and oil major Royal Dutch Shell. The dividend payments weren’t huge. In total, they came to about £100. However, I didn’t have to do anything at all to receive these payments. It was classic passive income.
It’s worth pointing out that before the month is over, I’ll also receive dividend payments from a number of other FTSE 100 companies. I’ll collect income from Reckitt Benckiser, financial services companies Prudential and Legal & General, and packaging specialist Mondi.
So, in total, I’ll receive seven separate cash payments in the space of just a month. Not bad at all when you consider earning this income has required no work at all.
Tax-free passive income
The best thing about this passive income? It’s all tax-free. I don’t have to pay a single penny of tax on it. Why? Because I hold my FTSE 100 dividend stocks within a Stocks and Shares ISA.
By holding them in this type of tax-efficient investment account, instead of a regular share trading account, all my dividend income is sheltered from the taxman. It doesn’t matter how much income my dividend stocks generate, it’s all completely tax-free.
Get the cash rolling in
In summary, generating a tax-free passive income from FTSE 100 dividend-paying companies isn’t hard. You do have to do a little bit of research when you get started, of course. You need to invest in reliable dividend payers.
However, once you’re invested in top FTSE 100 dividend stocks, you can literally kick back and watch the cash payments roll in.
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Edward Sheldon owns shares in Diageo, Sage, Unilever, Reckitt Benckiser, Royal Dutch Shell, BAE Systems, Mondi, Prudential and Legal & General. The Motley Fool UK has recommended Diageo, Prudential, Sage Group, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.