There are plenty of ways people try and earn passive income. They could start a business or enter the property game. But by investing in blue-chip companies with proven business models, I hope to build passive income streams through dividends.
I find it one of the simplest methods. Companies pay dividends to shareholders as a form of profit sharing. With the excess cash they make every year, they look to reward loyal shareholders with a payout.
Of course, this isn’t always guaranteed. A business may not make enough money to pay them. Even if it does, it may decide not to. Dividends are never guaranteed.
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However, by doing the correct due diligence, I reckon I could generate powerful streams of passive income to set me up for the years to come.
Putting the money to work
Let us say I have £9,000 stashed away in savings as an example. Of course, I could use whatever amount I had saved up, though this would impact how much income I receive.
Having that amount is no easy feat. So, I would want that hard-earned cash to work as hard as possible for me. That’s why I would set up a Stocks and Shares ISA.
Every UK investor has a £20,000 limit to use up every year. With the profits I make through the ISA, I do not pay a penny in tax.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Finding the best
After doing that, I would then start hunting for which shares to buy. There are a few factors I would take into consideration.
Firstly, I would look for companies with an already proven business model and a history of rewarding investors with sizeable dividends. While past performance is by no means an indication of potential future gains, this would give me greater confidence in the company’s future dividend prospects.
I would also make sure to diversify. I would opt for between five to 10 companies. By doing this, I offset risk.
As an example, let me share one stock I would happily add to my passive income portfolio today if I had the cash: Legal & General (LSE: LGEN).
I see many positives with the business. It operates in a sizeable market and is a well-known company with strong brand recognition and a large customer base. Furthermore, the industry it specialises in is predicted to see demand steadily rise in the years ahead.
To go with that, it has a current dividend yield of 8%, double the FTSE 100 average. In the last 10 years, its dividend has increased from 11.25p to 20.34p.
Of course, I suspect the stock will face further volatility this year as economic uncertainty could mean Legal & General’s clients pull out of funds. This would harm profits. However, as a long-term buy, I think Legal & General is a smart one.
Making passive income
Taking that 8% yield and applying it to my £9,000 ought to earn me £720 a year in passive income. That would come in handy, but it is some way off my £12,300 annual target.
To achieve that, I would simply keep reinvesting the dividends. On top of that, I would add a further £100 monthly contribution. Compounding at 8% annually, after 25 years my £9,000 could generate £12,300 in passive income a year.
