One simple way to earn passive income is investing in blue-chip shares that pay dividends.
Not all shares make such payouts, even if they have done so before. But in any given year, well-known British firms distribute tens of billions of pounds of spare cash in the form of dividends. By owning their shares, I could benefit from this bonanza.
If I wanted to target £2,000 a year of passive income from the well-known financial services provider Legal & General (LSE: LGEN), here is how I would go about it.
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Picking winners
Although in this example I discuss buying shares in only one company, that is because I already own shares in other businesses that pay my dividends. I would try to keep my portfolio diversified. That way, if one company cuts its dividend or experiences a share price collapse, the impact on my overall portfolio is reduced.
Why am I using Legal & General in this example?
Put simply, I see it as an attractive income share – and one I would be happy to buy if I had spare money to invest.
The business benefits from resilient demand for products like pensions, a well-known brand and large current customer base.
That has helped generate large cash flows the company uses to pay juicy dividends. The dividend yield is 8.2% and this week the company raised its annual dividend by 5% to 20.3p per share.
Setting up income streams
So, to aim for my target of £2,000 in annual dividends, I would need to buy 9,833 shares in the FTSE 100 financial services provider. At the current price, that would cost me around £24,400.
If I did that, I ought to earn £2,000 in dividends per year.
In fact, I could earn more. In most recent years the company has raised its annual dividend (2020 was the exception and that year it was held steady). Over the past four years, the firm has distributed £4.5bn in dividends. Even on top of that, though, it has generated net surplus cash of £0.8bn.
The dividend could keep going up, if the business performs well. That could make it even more attractive from a passive income viewpoint.
Looking ahead
Will it happen though?
Earnings per share last year were sharply lower than the prior year. That was largely driven by investments varying in their return, a risk that is ever-present for a pensions provider.
In a competitive market like pensions, there is also an ongoing risk that new entrants or existing rivals will cut prices, putting pressure on profit margins.
But I see Legal & General as a proven operator. It has multiple strengths and last year proved yet again that it can generate substantial spare cash and fund a beefy dividend.
That is the sort of passive income idea that grabs my attention!
