As a laid-back guy, my goal is to make the most money from the least work. And experience has taught me that my favourite earnings are those I bank without any effort: my passive income.
What is passive income?
I make passive income while not working. As this involves no time and effort from me, it’s the sweetest income of all. And as mega-billionaire Warren Buffett once warned: “If you don’t find a way to make money while you sleep, you will work until you die.”
Before the global financial crisis (GFC) of 2007-09, passive income was easier to come by. But after the GFC, interest rates were cut to record lows. Hence, interest paid by cash deposits and fixed-income bonds plummeted. This slashed the amount of income generated by cash and safer investments. Therefore, to earn higher passive income today, I no longer rely on cash and bonds.
Dividend shares deliver my passive income
John D Rockefeller — the richest American ever — once remarked: “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” Like Rockefeller, I love collecting dividends, right from when I first started investing in 1986/87. Today, my #1 way of collecting passive income is buying dividend-paying shares.
My first problem is that investing in shares is riskier than saving in cash or buying safe government bonds. My second problem is that not all shares pay dividends. Those that do make regular cash payments to shareholders, typically quarterly or half-yearly. My third problem is that dividends are not guaranteed — they can be cut or cancelled at any time.
Nevertheless, by buying shares in large, established public companies, I become part-owner of these businesses. When they do well, they often reward shareholders with increased dividends. And that means more passive income for me.
Six super dividend shares
Currently, the UK’s FTSE 100 index offers a dividend yield of around 4% a year. But I can beat this cash yield by buying various higher-yielding FTSE 100 shares. Here are six Footsie shares that pay bumper passive income to patient investors.
| Company | Business | Share price (p) | Market value (£bn) | P/E | Earnings yield | Dividend yield | Dividend cover |
| Persimmon | Housebuilding | 2,206.0 | 7.2 | 9.0 | 11.1% | 10.7% | 1.0 |
| Rio Tinto | Mining | 5,438.8 | 93.6 | 5.4 | 18.6% | 10.6% | 1.7 |
| Direct Line Insurance Group | Insurance | 257.1 | 3.4 | 10.7 | 9.4% | 8.8% | 1.1 |
| Imperial Brands | Tobacco | 1,635.8 | 15.5 | 5.5 | 18.3% | 8.5% | 2.2 |
| Legal & General Group | Insurance | 254.4 | 15.6 | 7.8 | 12.8% | 7.0% | 1.8 |
| British American Tobacco | Tobacco | 3,267.0 | 74.6 | 11.3 | 8.8% | 6.6% | 1.3 |
As you can see, dividend yields from these six shares range from 10.7% a year at housebuilder Persimmon to 6.6% a year at tobacco manufacturer British American Tobacco. The average dividend yield across all six shares is a tidy 8.7% a year. That’s close to 2.2 times the wider index’s cash yield.
While I’d happily buy all six shares for my portfolio today, I would never put all of my money into so few stocks. This mini-portfolio pays generous passive income, but it would be far too concentrated and risky for my blood. That said, any or all of these dividend dynamos would be a welcome addition to my family portfolio. And, as a smoker myself, I don’t mind owning tobacco stocks for income!
