Earning a lifelong passive income is the key to financial freedom. As American billionaire investor Warren Buffett once said: “If you don’t find a way to make money while you sleep, you will work until you die.â€
So how might someone go about doing this, even with a relatively modest level of savings?
Some numbers
According to a survey by Finder, the average person has £19,214 saved. But this hides a wide disparity in figures. The research found that 16% of all UK adults have no savings at all and 39% have less than £1,000 tucked away.
Historically, many people have invested in bricks and mortar as a means of generating a passive income. However, rising borrowing costs and the need for a large deposit means £19,214 is unlikely to go very far in today’s market.
Another approach is to buy dividend shares. For example, the top 10 yielders on the FTSE 100 are currently offering a return of 6.6%.
And savvy investors know that bigger gains can be made by reinvesting these payouts. Doing this could increase the yield on the initial lump sum to 6.5% in year two and 7% in year three, and so on, all other things being equal.
Based on a return of 6.6%, a portfolio of £19,214 would – if all goes to plan — earn £1,268 in dividends over the next 12 months. Some companies pay quarterly dividends whereas others make interim and final payments each year. Either way, there’s likely to be a steady flow of cash.
Can this be true?
Earning money from doing nothing is what income investing is all about. However, there are risks.
Dividends are never guaranteed. They are a distribution of profit and can therefore fluctuate in line with earnings, which are heavily dependent on the business cycle and macroeconomic conditions. Also, there’s little point earning a healthy income stream if your capital’s being eroded due to a falling share price.
Despite these challenges, there are plenty of people that have made good money from investing in UK dividend shares.
Any examples?
One of the highest-yielding FTSE 100 stocks is Land Securities Group (LSE:LAND). It owns a £9.8bn portfolio of offices, shopping centres, and retail parks, which could appeal to those that like the idea of investing in commercial property without wanting to get into debt or deal with tenants.
Based on amounts paid over the past 12 months, it’s presently returning 6.9%. This means a £19,214 investment could yield £1,326 in dividends.
Importantly, the stock has a good track record of raising its dividend – it was last cut during the pandemic – and it’s looking to boost it further by moving into residential property.
Despite this, it’s not immune from the cyclical nature of the UK property market. And its relatively high level of borrowings makes it vulnerable to interest rates staying higher for longer.
But as a real estate investment trust, tax rules require the group to return at least 90% of its rental profit to shareholders via dividends each year.
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.
Also, the quality of its portfolio means it has an occupancy rate of around 95%. At its retail parks, it’s 99%.
Personally, I believe Land Securities Group is one of many UK shares that could be considered by those attracted to the idea of earning passive income.
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More reading
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- Here’s how FTSE 100 dividends produce potent passive income
- With the potential to double in 10 years, this could be a dividend stock to consider buying
- Is this market correction a once-in-a-decade chance to buy ultra-high-yield income stocks?
James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended Land Securities Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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