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Passive income is cash that steadily rolls in with little-to-no ongoing effort. There’s plenty of ways to aim for this, but for me the best way to target it is by buying dividend shares.
Buy-to-let? With high upfront costs, falling tax breaks and day-to-day management, you can forget it. Savings accounts yield too little in interest, even in recent years after Bank of England rate hikes.
Other more modern schemes — like uploading YouTube content, creating online courses, or operating a fleet of vending machines — require far too much effort for my liking.
With dozens of UK dividend shares offering consistent sky-high yields, I feel there’s really no reason to burden myself with extra effort or poor returns.
10 of the best
If I invested a £20,000 Stocks and Shares ISA in 6%-yielding dividend stocks, I’d enjoy a healthy second income of £1,200 a year. There are 10 stocks on the FTSE 100 alone that offer forward yields at or above this level, namely:
- Legal & General (LSE:LGEN) (7.7%).
- Londonmetric Property (6.9%).
- Standard Life (6.8%).
- Land Securities (6.7%).
- Barratt Redrow (6.5%).
- Aberdeen (6.2%).
- M&G (6.2%).
- Aviva (6.1%).
- Investec (6.1%).
- Imperial Brands (6%).
This list is packed with shares that enjoy rising profits and robust cash flows. They also have boards who are committed to paying large and growing dividends over time. The result? A recipe for substantial passive income not just today but over the long haul.
The average dividend yield on these five FTSE 100 shares is 6.5%. Now let’s assume they pay the dividends analysts are expecting this year, and also raise annual payouts 2% over the next 25 years. If dividends are reinvested, the passive income they deliver will gradually rise to:
| Year | Passive income on a £20k ISA investment |
|---|---|
| 5 | £1,810 |
| 10 | £2,740 |
| 15 | £4,140 |
| 20 | £6,270 |
| 25 | £9,480 |
Dividend boom
By Year 25, the dividends a £20,000 ISA provides will be more than seven times higher than that delivered in Year 1, at almost £9,500.
That’s a nice extra bit of cash to have in your pocket. But here’s the thing. With the added firepower of extra ISA contributions, the amount of passive income your investments throw off can be truly life changing.
Let’s say an investor puts another £300 into those 10 FTSE 100 dividend share a month. By the time they reach Year 25, they’ll have generated a £29,061 annual passive income.
A 7.5% income opportunity
Top yielder Legal & General is a dividend share I hold along with Aviva. Why? It’s one of the FTSE 100’s greatest dividend stories. The company’s raised cash rewards every year since 2012, stripping out 2020 when the pandemic prompted it to freeze dividends. Furthermore, over the past decade, yields on Legal & General shares have averaged a stunning 7.5%.
Past performance isn’t always a reliable guide to the future. And rising competition across the FTSE firm’s markets could hamper dividends over the next 10 years.
However, I’m optimistic Legal & General will remain a formidable passive income provider. Its cash flows remain rock solid, and its Solvency II capital ratio a brilliant 210%. I expect earnings and dividends to grow strongly over time as demographic trends supercharge growth across its markets.
Should you invest £5,000 in Legal & General Group Plc right now?
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Royston Wild owns shares in Legal & General and Aviva.
