Receiving passive income for the rest of my days sounds like a dream. But I can think of three ways that give me a chance of making this a reality.
Big hitter
One option is for me to buy stock in companies that pay dividends. Fortunately, there’s no shortage of these in our home market!
An example would be financial services provider Legal & General (LSE: LGEN).
From my research, I can see that this FTSE 100 giant has a monster forecast dividend yield of 9.3%. This makes it one of the biggest payers in the entire market. For perspective, it’s also nearly double what I’d get from the best Cash ISA around.
On top of this, the company has a decent history of increasing the amount of cash it returns every year. This is something I really like to see. A big dividend is nice but a rising one suggests that the underlying business is in good health.
A further argument in favour of me loading up on this stock is the valuation. Changing hands for a little less than 11 times forward earnings, Legal and General looks cheap relative to the rest of the market. So, there’s a chance that I might make a decent capital gain on top of that passive income if/when economic confidence returns.
Assume nothing
Notwithstanding all this good stuff, it would be foolhardy to depend on just one stock for my passive income stream for the rest of my life. Dividends are never nailed on. In fact, they might quickly be reduced if a company runs into trouble. This is exactly what happened at Legal & General during the Financial Crisis.
As much as I like the £14bn cap for its income credentials, building a portfolio of, say, 10-15 dividend stocks from across the UK market feels much more prudent and should help to mitigate this risk.
Fuss-free investing
A second, less demanding way of earning passive income to hold…passive investments in the form of index trackers
As they sound, these funds just track the return of the market. If the FTSE 100 goes up by 5% in one year, I can expect a fund that follows this index to do the same (minus fees).
However, a FTSE 100 tracker also generates dividends. The yield currently stands at 3.6%.
The great thing about this strategy is that my money is spread around many companies, including Legal & General. The drawback is that passive income will be nowhere near what I’d get from the latter on its own.
This brings me to a third option: a combination of the two already mentioned.
Best of both worlds
Why would this appeal? Well, every investor is different when it comes to how much risk we are willing to take to hit our financial goals. But trying to gauge our own tolerance as accurately as possible should help us to build a portfolio that allows us to sleep at night.
So, there’s nothing to stop me from having a good dollop of my cash in a conservative tracker fund or two while also owning share in a few great dividend stocks. Collectively, this could earn me more passive income than just following the index.
Over time and if reinvested, that could compound into something really special.
This post was originally published on Motley Fool
