What is passive income? It’s income we get without having to work for it. Sounds good? So what’s the best way to achieve the dream?
For me, it’s all about buying shares in companies that pay dividends. But wouldn’t I need a fat wad of cash to generate any kind of meaningful income?
I see two main answers. Firstly, I’m not looking for enough passive income to live the life of a millionaire. Even a few hundred pounds a month would make a nice addition to my main income.
It’s like working at my regular job and then having an extra contribution just dropping into my bank account without having to lift a finger.
Start small, build big
My other thought is that it’s surprising how much money we can accumulate by making modest regular investments. That £20 a week is £1,040 per year. So I’d stash it away in my ISA account every week. And I reckon that would be enough to make two dividend share investments in a year to generate passive income
The FTSE 100 is expected to deliver 4% in dividends in 2022. But that includes all the big dividend payers and the ones that pay little or nothing. So by going for the bigger dividends, I hope I could average 5-6% each year.
That is by no means guaranteed, as it’s entirely up to each company how much they want to hand out every year. If they need to reinvest in R&D, for example, they might choose to keep more cash and pay less.
Dividends not guaranteed
Additionally, when times are tough, companies might suspend their dividends completely. That’s exactly what happened during the Covid-19 pandemic, when the banks in particular all stopped paying out. So shareholders’ passive income took a hit.
Still, on the bright side, those dividends are all resuming. And some are already coming in even better than before.
Research has found that the UK stock market has delivered total returns averaging about 4.9% above inflation for more than a century now. The past decade might not have lived up to that long-term record, mind, with crisis after crisis hitting British shares. But short-term down spells are something we just have to live with.
Long-term passive income
I look to the long term, investing for decades and aim at generating passive income to top up my retirement spending. Over that timescale I’m happy to take whatever risks shares throw at me. And the risks reduce the longer I leave my money in.
The longer I stick at it, reinvesting my dividends every year until I need the income for spending, the greater I think my chance of getting my 5-6% per year in passive income.
I certainly don’t see any way I could get close to that by putting £20 per week into a savings account.
So starting today, I’d still have a lot to learn about investing in shares. But by stashing away my £20 per week, I reckon I’d be making a great start to my passive income ambitions.