Passive income is defined as earnings from an activity in which a person isn’t actively engaged. My preferred method of generating additional cash — from doing very little — is to invest in dividend stocks through my ISA.
However, there’s some up-front work required to find the best shares in which to invest. And personally, I like to actively monitor my portfolio.
But in general terms, I think it’s possible to generate a healthy level of passive income with very little effort.
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A cautious approach
As a risk-averse investor, I like to buy FTSE 100 stocks.
Although there are no guarantees, these should be less risky than other shares, at least in theory. They are the UK’s largest listed companies with – in most cases — strong balance sheets and global footprints. Their earnings tend to be the most reliable. This means they are often in a position to pay steady and reliable dividends.
When it comes to identifying the best income shares, investors often study yields. These are usually calculated by looking back over the past 12 months.
However, it’s important not to get too carried away. Just because a company paid a generous dividend in the past, doesn’t mean this’ll continue into the future.
Vodafone is a good example of this. Based on dividends paid since 1 February 2024, the stock’s currently (31 January) yielding 10.9%. In fact, on this basis, it’s the highest on the FTSE 100. However, in May 2024, it announced a 50% cut in its dividend.
When it comes to returns to shareholders, it’s a case of buyer beware. However, there are plenty of other high-yielding stocks around. In fact, the average of the Footsie’s top 10 is currently 7.9%.
If an investor started with £20,000, a 7.9% return would give them £1,580 in dividends in year one. By reinvesting this, they could receive £1,705 the following year. Repeat this annually and — after 30 years — they’d have £195,737.
This would generate income of £15,463 a year, or £1,289 a month. But remember, this ignores any capital growth (or losses).
By coincidence, there’s one FTSE 100 share that’s presently yielding the same as the average of the 10 best.
One for consideration
Taylor Wimpey (LSE:TW.) built 10,593 homes in 2024. Admittedly, this is 255 fewer than in 2023.
However, I think there are signs that conditions in the housing market are starting to improve.
The housebuilder says its current level of enquiries is “encouraging”. At 31 December 2024, its order book was a fraction under £2bn. This is a 12.5% improvement on a year earlier.
Importantly, the company has plenty of land on which to build. At the end of 2024, it owned 79,000 plots with a pipeline of 47,000 more.
And if the Bank of England continues to cut interest rates, this should help further stimulate demand.
However, the UK economy looks fragile to me. Any sign of a further weakening could damage consumer confidence and stall the housing market recovery.
I already own shares in another housebuilder, so I don’t want another one in my portfolio. However, if an investor was looking for a solid income share, I think Taylor Wimpey’s worth considering.
Although it’s never a good idea to invest exclusively in one stock, the figures above show what’s possible from a portfolio of high-yielding shares.
