Passive income can come from property, side businesses, index funds, or dividend shares. But each route has different trade-offs.
Property usually needs a big upfront deposit, maintenance costs, and time to manage tenants. A business can take less capital at the start, but it often demands real effort before it produces anything.
Dividend investing is one of the purest passive methods because, once the money is invested, the process is simple: keep adding regularly, reinvest the cash, and let the portfolio do the work.
However, it also requires patience and dedication before the real returns start rolling in.
A few scenarios to consider
It’s important to calculate how much you can afford to invest and estimate a realistic goal. This can help keep your passive income strategy on track.
This chart shows how much a portfolio could grow to in 10 years, using various average returns and monthly contributions. Keep in mind, this would involve reinvesting any dividend income along the way.
| Monthly investment | Total return (%) | Final amount |
|---|---|---|
| £300 | 9 | £58,789 |
| £400 | 8 | £74,066 |
| £500 | 7 | £87,547 |
This highlights the significant difference that larger monthly contributions can make each month, even if the average return is smaller.
That matters, because aiming for an unrealistically high yield brings about risk. You could end up losing more money in the long run than if you aimed for a lower yield but dedicated a larger monthly contribution.
So what’s the ‘safest’ method to target steady, reliable returns?
The defensive income angle
As an investor with a low appetite for risk, I prefer to opt for lower-yielding, defensive shares as the foundation of my portfolio. That means accepting a less exciting average return, while adopting zen-like patience and faith in the long-term outlook.
In exchange, I’m able to sleep far more comfortably knowing my portfolio faces minimal risk of losses.
One of my favourite defensive income stocks is National Grid (LSE: NG.), the utility company that operates the UK’s gas and electricity network. Since it sells an essential service (not a discretionary one), it’s less likely to suffer severe losses during an economic downturn.
It’s also committed to spending at least £70bn over the next five years to modernise and expand energy networks, following an £11.57bn investment in 2025. That’s ramped its debt up above £44bn, a risky level to hold. If interest rates remain high or it can’t refinance, it may be forced to cut dividends
Still, the company’s five-year framework targets asset growth of around 10% and underlying earnings growth of 8% to 10%, with dividend growth aimed in line with UK CPIH. That’s encouraging.
But its yield typically hovers around 4% — a level that might leave income-hungry investors unimpressed. Still, it’s important to not underestimate the importance of low-risk, reliable investments.
That doesn’t mean it should make up your entire portfolio. Defensive shares like National Grid can form a stable foundation, while higher-yielders like Legal & General help boost the overall income.
The bottom line
I like defensive shares because they can make the journey feel calmer. National Grid still faces execution risks with its infrastructure plan but its results show a business that’s growing its asset base and keeping the dividend moving forward.
Defensive shares don’t remove all risk, but they do make the income stream more reliable. For early investors, that calmer ride can be just as valuable as the dividend itself.
In my opinion, aiming to secure a safer future for yourself matters more than chasing the highest yield today.
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Mark Hartley owns shares in National Grid and Legal & General.
