As I look ahead to the new year, I’m already planning how I can increase the amount of passive income I generate.
Making extra funds outside of my main source of income provides me with some additional security when it comes to my finances. And while this may not seem viable, it most definitely is.
With a very small sum, investors can build a healthy-sized pot over time. Here’s the plan and methods I’m using as we head into 2024 and beyond.
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Where to start
In my opinion, the best place to start is the stock market. Granted, with the UK base interest rate at 5.25%, some savings accounts currently offer sizeable yields. However, one thing they fail to offer is growth opportunities.
Take the FTSE 100 as an example. Since its inception, it has returned nearly 7% on average. What’s more, the average dividend yield among its constituents is a solid 4%.
This year it’s predicted the Footsie will pay just shy of £80bn to investors via dividends. And currently, there are 13 stocks that offer yields higher than the UK’s current inflation rate of 6.7%.
Selecting the best
What I also plan to do is pick the right stocks. And there are a few criteria I look for when doing this.
Firstly, I plan to target stocks that I think can provide stable growth.
On top of that, I’m also looking for companies that have a strong track record of paying out to investors. While past dividend payments are no indication of future returns, a history of payments provides me with confidence that the business is likely to pay me in the times to come.
Additional methods
The final step I plan to take is to reinvest my dividends. This way, I can benefit even more from the power of compounding.
Moreover, I’d also diversify my investments between companies and sectors to mitigate risk. By doing this, I’m less prone to large fluctuations in certain industries.
What I’d buy
So, with the above in mind, what sort of stocks am I planning to buy?
One that I’ve been watching closely is Legal & General (LSE: LGEN). With its share price at 222p, it’s down around 4% in the last 12 months. In 2023 it has fallen by over 10%.
My main attraction to Legal & General is its yield. At 8.8%, it’s one of the highest on the Footsie. What’s more, the business is nearing completion of a cumulative dividend initiative. And as part of that, it plans to return over £5.5bn to shareholders via dividends by next year.
Its dividend has steadily increased in the last decade. Furthermore, last year its payout was covered two times by earnings.
Aside from the passive income opportunity, I think the stock provides ample opportunity for growth. Its iconic brand is a strong competitive advantage. With a price-to-earnings ratio in the single digits, it also looks cheap.
The macro environment has seen its assets under management take a hit. And as people tighten their belts, this may continue to play out in the months ahead. Its longstanding CEO stepping down may also be a source of concern.
However, I see long-term growth potential. In 2024, its stocks like Legal & General I’ll be targeting.
