With summer upon us, work can be far from some people’s minds. This can be exactly the sort of moment when passive income could potentially show its value, providing some extra spending money without needing to work for it.
One common way to earn passive income is owning shares in businesses that pay dividends to shareholders.
Helpfully, such a passive income plan can be tailored to somebody’s means even if they are modest.
Putting some spare money to work
For example, imagine someone has £1,000 they are not using.
They could put it into shares – spreading it across a few different ones to keep their passive income stream diversified – and then potentially earn dividends as soon as this summer, depending on what shares they buy.
£1,000 would earn around £31 per year at the current dividend yield of the FTSE 100 (3.1%).
I think a higher yield is possible even while sticking to proven blue-chip shares. But even, say, 5% would only equate to annual passive income of £50.
That could be some handy pocket money, but not much more than that.
Over time, though, it could grow, whether because more money is added, dividends grow, or they compound some dividends to buy more shares without needing more cash (or all three).
A carefully selected group of quality dividend shares strikes me as a realistic though not foolproof method to try and set up ongoing passive income streams.
Keeping a lid on costs
One thing that can eat into returns is the cost of buying and owning shares.
They could be fees, commissions, management charges for an ISA (even when you manage it yourself), and so on.
So, it is important to pay attention when deciding what share-dealing account, Stocks and Shares ISA, or trading app to use.
One income share I like
One share I think merits consideration for its passive income potential is financial services group Legal & General (LSE: LGEN).
Its 7.9% yield is the highest in the FTSE 100. Not only that, but the company aims to keep growing its dividend per share each year, as it has been doing in recent years.
From a passive income perspective, then, the appeal is straightforward. But dividends are never guaranteed to last. The company sold a large US business this year, so I see a risk that revenues and earnings in the residual business will be smaller in future.
The share price has gained 8% over five years. I see that as weak: the FTSE 100 has grown 46% during that period. Still, the limited price growth does mean the shares look attractively valued to me.
The company benefits from a proven, cash-generative business model, strong brand, large customer base, and strategic focus on a market segment with resilient demand. I see Legal & General as an income share for investors to consider.
Should you invest £5,000 in Legal & General Group Plc right now?
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Christopher Ruane does not hold any positions in the companies mentioned.
