Buying shares in UK companies as a way to earning passive income? It’s all very well if things go right.
But isn’t buying shares risky, and aren’t I afraid of losing my shirt? I bought some Lloyds Banking Group (LSE: LLOY) shares about a decade ago, and that looks like a disaster.
But let’s dig a bit deeper…
Long-term?
Long-term investing means holding for at least 10 years, doesn’t it? In 2014, Lloyds shares were priced around 84p. Since then, they’re down 50%. How much longer do I need to hold? Two decades, three..?
This isn’t the whole picture though. And I’ve had some dividends over the decade. Back then, Lloyds was only just back to paying dividends after the banking crisis. And, up to today, the stock has paid me 20.7p per share in income.
Softer blow
So every 84p I plonked down is worth about 63p now. That’s not great in 10 years. But it does turn that headline 50% share price loss into a more palatable 25%.
But here’s the real nub. That’s by far the worst performance I’ve had from one of my passive income shares in at least the last 20 years.
In fact, because I’ve kept my stocks diversified, I’m comfortably ahead. And that’s how long-term investment works.
What next?
And my Lloyds story isn’t over. I didn’t take any income in that time, and bought new shares with my dividend cash. It wasn’t all Lloyds, though sometimes it was — I just rolled the money into whatever I was buying next.
When I did buy more shares, I got them at lower prices, and snagged more dividend cash, which I could use to buy even more shares, and so on.
So my actual loss will have been less than that 25%. My worst passive income investment of the century is looking less like a disaster by the minute.
The future
But it’s still not over. I intend to buy more shares this year, and hopefully every year, as long as I think they’re good value.
There’s a forecast dividend yield of around 7% for the next few years. If the shares don’t move and the dividend stays the same, £1,000 in Lloyds today could grow to £1,970 in 10 years on reinvested dividends alone.
And if, as I hope, the share price finally recovers, I could end up with an even bigger pot.
I could build up some decent passive income for my retirement despite the intermediate share price falls. Oh, hang on…
No, I’d end up with more shares and better income because of those falls. Because they gave me more shares for less.
Dealing with risk
Lloyds still faces risks, for sure. The economy might hold back earnings, the dividend might falter… we just need to look back at the last 10 years to see the uncertainty.
But that just reinforces my three-pronged approach to passive income investing. Do it for the long term, keep well diversified, and rejoice when share prices fall and I can get more for the same money.
