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I really enjoy receiving passive income. For me, receiving unearned funds without working is one joy of investing (the other being capital gains from rising share prices).
My favourite ‘free’ income
The various forms of passive income include savings interest, coupons from government and corporate bonds, rental income, pensions, and more. But my favourite is share dividends — the cash returns from owning certain companies’ stocks.
At present, my wife and I own multiple US stocks and UK shares, with the latter paying out most of our dividend income. Not all UK-listed shares pay out dividends — some businesses are loss-making, while others reinvest their profits into future growth.
Nevertheless, all FTSE 100 and FTSE 250 shares in our family portfolio deliver decent dividends to patient shareholders. That said, owning dividend-paying shares isn’t necessarily a guaranteed path to riches. But why?
First, future dividends aren’t guaranteed, so can be reduced or stopped at short notice. Second, paying overly-generous dividends can drain companies’ coffers and weaken their balance sheets. Hence, very high dividend yields sometimes warn of problems to come.
Powerful passive income
Many Footsie firms pay out market-beating dividends to shareholders. For example, take these shares of three very different companies, with cash yields among the FTSE 100’s highest (sorted from highest to lowest yield):
| Company | Share price* | Market value | Dividend yield | One-year change | Five-year change |
| M&G | 219.5p | £5.3bn | 9.2% | +5.8% | +101.1% |
| Taylor Wimpey | 117.65p | £4.2bn | 8.0% | -21.0% | -16.2% |
| British American Tobacco | 3,131p | £68.6bn | 7.6% | +26.0% | +2.7% |
*Prices and values at time of writing
At 9.2% a year, shares in asset manager M&G (which is included in my family portfolio) offer the highest cash yield of the three. Also, M&G’s share price has more than doubled over five years, but its stock was deeply depressed in 2020 during the Covid-19 crisis. Housebuilder Taylor Wimpey‘s dividend yield sits at 8% a year, while the cash yield of tobacco giant British American Tobacco (LSE: BATS) is just below this mark. However, Taylor Wimpey’s share price is down over both one and five years.
Across all three dividend stocks, their average yield comes to 8.27% a year — more than twice the FTSE 100’s cash yield of around 3.7%. Thus, £10,000 invested evenly across all three holdings would produce a yearly income of £827. Even better, this payout would be tax-free inside a Stocks and Shares ISA. Nice.
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.
Smoking hot?
British American Tobacco shares are widely held by income-seeking investors, both individual and institutional. This near-£70bn tobacco group’s sales generate tons of free cash to return to investors through high dividends and share buybacks.
Furthermore, its cash payout increased by 11.9% from 2020 to 2024, reaching a record 235.52p last year. But returning so much cash to shareholders might lead to a lack of future investment and innovation at this old-economy business. Indeed, its shares have risen by below 3% over the past five years, versus 49.5% for the wider FTSE 100.
As a big fan of passive income, I’ve wondered whether to buy into this Footsie firm for dividends and diversification. But my wife refuses to own tobacco stocks, as she has seen the harms smoking cause during her long career in drug development. Therefore, I won’t be adding this high-yielding share to our family portfolio!
