I am a huge fan of passive income — earnings from activities other than paid work. But why am I so keen?
Why passive income rocks
You can make unearned income in your spare time, sometimes with little or no effort. At its very best, it feels like ‘free money’ — something few of us would turn down.
Common forms of passive earnings include:
* savings interest from cash deposits
* bond coupons (interest from government and company debts)
* rental income from domestic or commercial property
* payments from personal, company, and state pensions
Personally, I don’t keep tons of cash on deposit with banks and building societies. Instead, I risk my money to make higher long-term returns. Likewise, I’m not a buy-to-let landlord, because this seems like a major hassle.
Why dividends are delightful
For me, the #1 passive income is share dividends. These regular (or one-off) cash payments are made by companies to their shareholder owners. However, here are four important facts about dividends.
First, investing in shares is risky, so you may get back less than you invested.
Second, most listed companies don’t pay dividends. Some businesses are loss-making, while others reinvest their profits to boost future growth.
Third, future dividends are not guaranteed, so they can be cut or cancelled at short notice.
Fourth, almost all of the London stock market’s dividends come from a handful of well-known or massive companies.
My dividend dynamo
For example, my family portfolio collects powerful passive income from Legal & General Group (LSE: LGEN) shares. Legal & General (widely known as L&G) was founded in 1826, making it 190 years old.
From humble beginnings in a London coffee shop, L&G has grown to become one of the UK’s biggest money managers. It is a major UK player in asset management, retirement provision, and insurance. Today, L&G looks after £1.2trn of financial assets for millions of individual and corporate investors.
My family has owned this FTSE 100 stock for almost four years, paying 247p a share for our stake. As I write, the shares trade at 272.2p, valuing this historic business at £15.2bn.
Though the value of our shareholding has risen by only 10.2% on paper, I’m a content L&G owner. That’s because these shares pay one of the highest dividend yields around. Currently, that’s 8.01% a year, versus around 3.1% a year for the wider Footsie.
Today, buying £10,000 of L&G shares would deliver £801 this year in dividend income. What’s more, this group has a great track record of lifting its dividend every year (except for Covid-hit 2020, when it was unchanged).
In a recent comeback, the L&G share price leapt from its 2026 low of 217.2p on 19 March to hit 285.8p last Friday, 22 May. This rise was helped by rumours that major US firms are interested in buying this great British business.
Of course, L&G’s fortunes are linked to the health of global capital markets. Thus, when the next financial or economic crisis arrives, its revenues, earnings, and cash flow will suffer. But I’ll keep steadily reinvesting our dividends into more L&G shares!
Should you invest £5,000 in Legal & General Group Plc right now?
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Cliff D’Arcy has an economic interest in Legal & General Group shares.
