When I think about investing for passive income, my focus is not on taking cash today. No, I look further ahead, to build up income for later in life.
But what if I had half a million pounds, to provide income right now? That’s a lot more than most of us can invest, certainly more than I have.
But for many of us, our ultimate goal is to build up as big a retirement pot as we can. And one day, we can hope to face the happy question of how to turn a big pile of cash into regular income.
So what might I do if I had to scratch my head over the puzzle right now?
Big yield bonanza?
Hmm, it might be tempting to put it all in Phoenix Group Holdings shares, and pocket a big 10.3% dividend yield. That would mean £51.5k a year in income, and I could have a nice retirement on that.
But it would be a lot of eggs in one basket. My income could fall badly if the dividend is cut. And the share price could tumble too, leaving me less capital to try to move somewhere else.
So, no, no matter how much cash I had, I’d still do my best to control risk. That would mean diversification, spreading my money across different stocks in different sectors.
Investment trust
If I did put a large portion into one stock, though, it would be an investment trust. I did buy some City of London Investment Trust (LSE: CTY) recently, but not remotely close to half a million.
The trust holds BAE Systems, Shell, HSBC Holdings, and a number of other top-drawer FTSE 100 stocks. Through them, it aims for long-term growth in income and capital.
On the income front, it’s on a forecast dividend yield of 4.8%. And it’s lifted the dividend for 57 years in a row.
So it’s not the biggest yield, but more predictable than many. And if the capital growth side of the plan at least keeps pace with inflation, my capital should be preserved.
DIY diversification
The trust itself is still just one company, though. If it failed to keep the dividend rises going, even for just one year, the share price could suffer. And no company is immune to things going wrong.
I might put a portion of my £500k into City of London. But nowhere near all of it.
I’d still learn from how this trust operates, though. And I’d allocate my £500 grand to some of the same stocks it holds.
Dividend focus
I’d weight more towards dividends, as my days of pot-building would be drawing to a close. So I might buy more financial stocks, like M&G (with a 9.5% yield) and Legal & General (8%). Maybe some Phoenix Group.
I’d need to weigh up the risks of the individual stocks myself, so that’s extra work. And it would need self-control.
But I’d hope to aim for an annual return of 6%-7% from dividends. And the £30,000-£35,000 that might raise could help me sleep at night.
This post was originally published on Motley Fool
