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I’m always interested in finding new ways to make a robust passive income. I love the idea of receiving a steady stream of money without having to lift a finger.
The trouble is that many passive income methods fail the first test. Most of them I’ve seen require a large amount of time and effort not only at the beginning, but throughout the life of the endeavour.
So I continue to believe that investing in shares, investment trusts, and exchange-traded funds (ETFs) are the best ways to make a second income over time.
The average savings pot in the UK stands at £17,365, according to Money.co.uk. Here’s how I’d invest it for a steady stream of dividends in retirement.
Getting started
The first thing I’d do is open a tax-efficient Stocks and Shares ISA or Self-Invested Personal Pension (SIPP). I can invest £20,000 in an ISA each year, and 100% of my annual income earnings — up to £60,000 — in a SIPP.
Over time, these products would save me a fortune in tax. The Office for National Statistics says that ISAs saved their holders a whopping £6.7bn in the last tax year alone.
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.
Next, I’d aim to fill my portfolio with a diversified selection of 10-20 stocks, spanning different industries and regions. This strategy reduces risk, and would allow me to (hopefully) make a smooth annual return across all points of the economic cycle.
I’d also look for companies that trade on attractive valuations. Those that trade at a premium can be more susceptible to share price corrections when things go bad.
A FTSE 100 stock
Legal & General Group (LSE:LGEN) is one FTSE 100 share I would definitely consider. The company offers financial products and services across the globe, including insurance, pensions, asset management, and later-life mortgages.
I believe it has a significant opportunity to grow profits from this point on. The number of older people in its markets is growing exponentially. Rising worries over pensioner benefits is also driving demand for personal investing products.
Against this backcloth, Legal & General expects its operating profit to grow at a compound annual rate of 6-8% by 2028.
On the other hand, Legal & General may struggle to grow earnings in the near term if broader consumer spending remains weak. It also has to paddle extremely hard to succeed in what it a hugely competitive marketplace.
Yet I believe these risks might be baked into Legal & General’s share price. At 229.6p a share, it trades on a below average forward price-to-earnings (P/E) ratio of 10.6 times. Meanwhile, its dividend yield for 2024 stands at an awesome 9.3%.
A £2,882 income
Using Legal & General’s 9.3% yield, I could expect to make a passive income of £1,615 this year. And if dividends remained the same — and the share price is unmoved — over 30 years my £17,365 would turn into £279,695 if I reinvested my dividends. Of course, that’s not guaranteed.
But if I supplemented my initial investment with another £300 each month, I could end up with £864,476 after 30 years. At this point I’d be earning an annual passive income of £80,396, or £6,700 a month. This would be more than enough to help me enjoy a comfortable retirement.
