One common way of trying to earn passive income is buying shares in proven blue-chip companies that pay dividends.
Indeed I do that myself. I own a number of dividend shares. Some, such as Legal & General (LSE: LGEN) are popular with quite a lot of private investors looking to earn some extra money without working for it.
The beauty of this passive income idea is its simplicity
So, how does this work in practice?
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I bought the Legal & General shares and now sit back and earn dividends whenever they are paid. It really is that simple!
In under a fortnight (on 12 March), Legal & General will unveil its final results for 2024. Part of that will be announcing its dividend. In fact though, it has already announced plans to grow its dividend per share annually at 5% for 2024.
If it does that, then the annual dividend will be around 21.4p. So, to target a £1,000 annual passive income, an investor would need to own roughly 4,673 Legal & General shares. At the current price, that would set them back around £11,355.
It is important that an investor does not put all their eggs in one basket, of course, so my example here presumes that Legal & General is just one element of a diversified portfolio.
What could go wrong?
That passive income is not guaranteed though. No dividend ever is.
Legal & General has set out a plan to grow the dividend by 2% annually from next year onwards. That is only a plan though: what happens in practice will depend on how the business performs.
The FTSE 100 firm has a good track record and its strong brand, large customer base and long history are all competitive advantages. But it did cut its dividend per share during the 2008 financial crisis. If another market crash happens, plummeting asset values could hurt profits at the business, threatening the dividend.
Even without that, as we hav seen, the firm plans to cut its annual dividend per share growth from 5% to 2% from this year onwards.
That 2% growth is still growth, of course. If it is delivered, an investor who bought 4,673 of the shares now could see their annual passive income grow above £1,000 as 2025 gives way to 2026.
But the cut reflects the fact Legal & General faces multiple challenges.
It operates in a highly competitive market. Its earnings over the past several years have been weaker than before. The recently agreed sale of a US business will raise cash but will reduce the size of its business, making it harder to sustain profits at current levels.
I’m invested in this high-yield share
That helps explain why the Legal & General share price is 7% lower than five years ago.
A falling share price could mean an investor loses money if they sell their shares for less than they paid for them.
But with a dividend yield of 8.5%, it is easy to understand why a lot of investors like the passive income opportunities offered by owning Legal & General shares. I am one of them and own some myself.
