If you dream of retiring early, you might want to take action to create a growing passive income from dividends. Money in the bank is losing value after inflation is taken into account. Especially given the meagre interest rates on offer from current accounts. Taxes on property, especially buy to let are heading up and, given government debt has risen because of Covid-19, may do so again.
That’s why I’m keen on creating a passive income from UK shares. I’ve put together an example portfolio of five shares that I think can combine income and growth and below-average volatility. I already hold two of these shares: National Grid and Polar Capital,and am very bullish on all these companies.
The portfolio for a killer passive income
Most of these shares are very steady companies, chosen because they should perform consistently. My first choice is Admiral because it’s a well run international insurance company that also has comparison websites. So it has more than one string to its bow.
Second is National Grid as demand for its services won’t go away. This makes it a dependable dividend payer. Its involvement in renewable energy could also make it more popular with investors going forward as that industry attracts more attention and investment.
Next up is the consumer goods group PZ Cussons because it has a strong portfolio of brands and Nick Train, a high performing fund manager, bought into the shares last year.
The other two shares I’d add to complete the portfolio are asset manager Polar Capital and investment trust City of London Investment Trust. The latter can add diversification and dividend payment reliability. It has been paying an increasing dividend for over 50 years. The former adds growth at a reasonable price and is in a stable, high-margin industry. That’s good for providing passive income.
How to create sustainable income from shares
When it comes to creating passive income from shares, these are the questions that it pays to keep in mind:
- What is the dividend cover? I like to see cover of above two times earnings.
- Has the company been able to grow the dividend? Also, how consistent is the dividend growth? I also want to see growth in the dividend, indicating management’s confidence in the future.
- Does the company or industry face major structural challenges that could impact the share price?
- What growth opportunities are there for the company?
After asking these questions, I conduct a more thorough SWOT analysis. This helps me better dig into what opportunities and threats a potential investment company faces. Once I’ve done this, I’m well on my way to being able to find investments that can help me create a long-term growing passive income from shares.