Making passive income is the dream of many investors. If I were sitting on a lump sum, I reckon I’d start building towards being able to make some extra cash.
To do that, I’m targeting dividend shares. There are other avenues I can explore, such as entering the property game. However, buying companies that reward investors with meaty yields may be one of the simplest ways to build up my nest egg.
If I had £10,000 stashed away, here’s what I’d do.
Being smart with my money
I want my money to work as hard as possible. As such, I’d invest via a Stocks and Shares ISA. Every investor in the UK is given a £20,000 annual contribution limit to invest in their ISA. If I decide I want to withdraw my funds, I can do so tax-free.
I’d also bolster my initial lump sum with monthly contributions. For me, I think £200 a month is viable right now. Over time, I hope to increase this. I know there are a host of benefits to investing regularly.
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.
A better lifestyle
I have one eye on my retirement. I want to start investing for it today. I know the longer my money is working for me in the stock market, the better off I’ll be further down the line.
My investing timeframe is 30 years. After that point, I hope to give up work and live off passive income. I can use it to enhance my lifestyle or for more practical uses such as paying bills.
The FTSE 100 has returned around 8% per year on average since its inception in 1984. Therefore, I’m going to use that as a target for how much I want to make in returns a year.
At that rate, after 30 years, my initial £10,000, plus my £200 monthly contributions, could be worth £409,416. If I were then to retire and apply the 4% ‘drawdown’ rule, that would leave me with £16,376 a year in passive income.
My plan
That’s all very well, but how do I plan to get there? Well, it’s through owning shares such as Legal & General (LSE: LGEN).
The stock yields 8.1%. That alone is appealing. However, I’m more drawn in by the steps the business has taken to maximise shareholder returns.
In its 2023 full-year update, Legal & General highlighted how it’s on track to return up to £5.9bn to shareholders as part of its cumulative dividend plan. It also upped its payout for the year by 5%.
Dividends are never guaranteed. So it’s such actions that I want to see when I’m considering buying a stock for the long term.
That said, my investment won’t come without volatility. For the year, profit after tax fell by over £300m. With interest rates still high, I’d imagine the business will continue to suffer in the months to come. Weak growth in the UK economy could also dampen investor sentiment.
However, trading on just nine times forward earnings, I think the shares look like good value for money. In my journey towards a more comfortable retirement, I’ll be using companies like Legal & General to help me get there.
This post was originally published on Motley Fool
