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Having been investing for nearly four decades, I’ve made many mistakes along the way. And as my investment style has evolved over the years, I have become increasingly fond of passive income.
Passive income — earnings I get from outside of work — comes from what young people these days call ‘side hustles’. But as I’m too ugly to be an online influencer and too lazy to be a landlord, my second income comes from owning various assets.
Types of unearned income
There are many forms of unearned income, but most of Britain’s passive income comes from just a few sources. For example, I could deposit money with banks or building societies to earn savings interest. Right now, leading savings accounts pay interest of around 4.8% a year before tax. That’s not terribly exciting to me, but it is very safe.
Alternatively, I could invest in bonds: IOUs or debts issued by governments and companies. For example, a 10-year gilt (UK government bond) currently offers a yield of 4.63% a year. But instead of investing in individual bonds, my family portfolio owns a stake in a low-risk money-market fund paying around 5% a year after fees.
Another of my passive incomes comes from pensions paid by former employers. Last year, I decided to start two of these payouts early, collecting lower monthly sums in return for early payment. Also, I should get the state pension when I turn 67 (in 10 years).
My favourite passive income
By far my favourite unearned income comes from the cash dividends some shares pay to their owners. Most UK-listed businesses don’t pay dividends to shareholders, but many FTSE 100 firms do. That’s why my family portfolio owns over 20 Footsie and FTSE 250 stocks for dividend income.
For example, my wife and I own shares in Legal & General Group (LSE: LGEN), one of Britain’s leading insurers and asset managers. Founded in London in 1836, L&G has grown huge over 189 years and now manages £1.1trn of client assets for individuals and institutions.
For companies that do it well, managing money can be a lucrative business. At the current share price of 253.9p, L&G is valued at £14.6bn. Over one year, its shares are up only 0.8% and have risen by just 1.2% over five years.
However, these above returns exclude dividends, which are very generous from L&G. At present, this stock’s dividend yield is a tidy 8.41% a year — roughly 2.3 times the wider FTSE 100’s yearly cash yield of 3.7%. What’s more, the group has billions of pounds of spare capital to support ongoing dividend payments.
Of course, future dividends are not guaranteed, so they can be cut or cancelled at short notice. However, investing £10,000 today into L&G shares would have delivered £841 of passive income last year. And with the company’s dividends having risen by 59.4% from 2015 to 2024, I’d expect this positive trend to continue.
Finally, I would never put all of my money into one stock — or even 10. I sleep easier at night knowing that my passive income comes from dozens of different companies working across the globe for me and my family!
