Everyone dreams of buying a stock and seeing it rocket in value overnight. But this is far from the only way of making money from the market. An alternative is to buy dividend shares that generate passive income.
Today, I’ll explain how an investor might do this using a very popular UK business as an example.
No guarantees
From the outset, it’s important to note that dividends are never guaranteed. A slide in profits could impact a company’s ability to distribute a proportion of that money to investors. Even if things are tickety-boo, management may elect to put more cash into improving the business in the hope that it will be pay off over the long term.
This is why owning a bunch of income stocks in a diversified portfolio is a prudent move.
Now, let’s say someone had £10,000 to put to work in a Stocks and Shares ISA. The amount doesn’t actually matter since holding a single share in a company still entitles the investor to receive any dividend paid out, even if it amounts to only a few pennies. The beauty of doing all this in an ISA also means that this cash will be beyond the reach of the taxman.
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.
One example to consider buying is insurance juggernaut Aviva (LSE: AV.)
Star dividend stock
I don’t think it’s particularly controversial to say that Aviva isn’t the sort of company to get the heart racing. That said, the share price is up 18% in 2025 already! It’s also up nearly 150% in the last five years, more than double the rise achieved by the FTSE 100 index as a whole.
A lot of this uplift is down to CEO Amanda Blanc’s (successful) efforts to steamline the business by selling off non-core assets. The recent capture of rival Direct Line also appears to have gone down well with the market.
Naturally, there are still risks here. Any issues with Direct Line’s integration could impact Aviva’s financial performance. Broader economic concerns, such as the bounce in inflation, might also have an adverse effect on profits and, consequently, dividends. Speaking of which, Aviva’s forecast yield sits at a meaty 6.7%. That’s almost double the average in the FTSE 100.
Put another way, £10,000 invested would deliver £670 in passive income in FY25. This is assuming that nothing changes from here. In reality, of course, the share price will move up or down (changing the yield). There’s also a chance that analysts have over- or underestimated the likely payout.
But it still gives us a number to work with.
Commitment required
By now, you’ve probably spotted one issue. That £670 is nowhere near the £3,560 mentioned at the top of this page. What gives?
Well, an investor really needs to keep reinvesting that money to get to the latter. This allows compounding to work its magic over time. Done this way, that holding in Aviva would hit our passive income goal in 25 years, assuming dividends aren’t cut (which isn’t guaranteed).
Sounds like a long time to wait? It doesn’t have to be that way. Remember that all this is based on not investing a single penny after that original £10,000.
Even just a few quid extra every month will be enough to speed the process up!
This post was originally published on Motley Fool
