As I’ve written repeatedly over the years, I’m a huge fan of passive income. This is income that I get without work or effort. To me, that’s as close to ‘free’ cash as I’ll ever get.
I like it to come from share dividends
There are many forms of passive income, including savings interest, bond coupons (also a form of interest), property rental income, share dividends, company pensions and the State Pension.
But my passive income comes almost exclusively from cash dividends paid by shares in listed companies. Here are four shares my wife and I bought last year for their powerful dividend streams.
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Bargain shares paying high dividends
During last year’s stock-market dips, my wife and I bought these four FTSE 100 shares at what we believed were bargain prices. Each of these stocks offers a market-beating cash yield well ahead of the blue-chip index’s 3.8% a year yield.
| Company | Aviva | Legal & General | Rio Tinto | Vodafone |
| Sector | Insurance | Asset management | Mining | Telecoms |
| Share price | 444.2p | 256.8p | 5,641p | 100.94p |
| 12-month change | -19.6% | -7.4% | -2.6% | -23.2% |
| Market value | £12.5bn | £15.3bn | £95.6bn | £27.4bn |
| Price-to-earnings ratio | 9.1 | 7.6 | 8.8 | 15.7 |
| Earnings yield | 11.0% | 13.2% | 11.3% | 6.4% |
| Dividend yield | 6.7% | 7.6% | 7.4% | 7.7% |
| Dividend cover | 1.6 | 1.4 | 1.5 | 0.8 |
The first thing my table shows is that all four shares have fallen in value over the past 12 months. Meanwhile, the FTSE 100 has risen by 6.4% over one year. Thus, all these stocks are lagging the wider index.
When seeking passive income, I look for shares with high dividend yields. In the above table, these range from 6.7% a year at insurer Aviva to a tasty 7.6% a year at asset manager Legal & General Group.
The average cash yield across all four stocks comes to 7.3% a year. That’s roughly twice what I could earn in yearly interest from a table-topping savings account.
However, not all of these cash payouts are completely covered by company earnings. The weakest dividend cover is at Vodafone Group, whose payout is only four-fifths covered by trailing earnings.
Now for the bad news
Of course, investing in shares is risky and investors can potentially lose up to 100% of their investment. But I consider the 7.3% yearly cash yield from this mini-portfolio of four shares to be a decent reward for being a patient, long-term shareholder.
Also, future share dividends are not guaranteed, so they can be cut or cancelled at any time. Indeed, Vodafone last cut its dividend in 2018, Rio Tinto did so in 2016, and Aviva did this in 2012, 2013 and 2019. But I lessen this risk by investing across a wide range of income-generating stocks.
Finally, dividend investing for passive income often comes with a bonus kicker. Since we bought these four shares, their values have risen by up to 11.9%, even though they’re down over 12 months. And it’s this killer combination of dividends and capital gains that gives us the freedom to retire when we want!
