The idea of creating an income stream in which you get paid without working is nothing new. It’s actually the fundamental basis of any investing or future retirement plan. Whereby someone can increase and generate additional sources of income.
In recent times, it has become somewhat trendy and fashionable and this long established concept has been repackaged as “passive income‘ in recent years, as people of working age seek to make more of their assets and abilities to boost their income.
It could cover an array of different activities from hiring out tools, side hustles, car cleaning, to renting out a room to prospective lodgers. To earning income sources from dividends, bank interest, cashback etc. when purchasing day to day expenses from certain websites.
There is almost always an upfront cost to creating passive income, but the idea is that it requires little continued effort to keep the money rolling in. It may appear somewhat slow in the beginning, but over time due to the power of compounding, the returns will snowball and increase over time.
What about building a portfolio !
Building up a portfolio of income investments fits neatly into this category. Once you’ve saved enough for a portfolio which provides you with a reasonable income. Once you are creating additional revenue streams your working options open up. This option may even allow you to work part-time in future, retire earlier than expected or even consider leaving the job that you may be stuck in.
So you could retrain in a new sector and who knows even follow your dreams to do something that you, that can be more rewarding and fulfilling whereby you are working on your terms and conditions and nit being dictated to by a so-called employer. Imaging having the freedom and options to choose how you spend the rest of your working life.
So how can I create additional income through investing !
A simple scenario when starting out could be through a simple bank or building society savings account. Which pays a level of interest annually or monthly on the savings that you have deposited with them. Most saving savings are relatively low at present, and the level of return may not be a lot or appear great when starting out. But as your level of amount saved, the returns will compound year on year as our saving pot grows over time.
What about if I want to do it faster or increase my level of passive income !
Once you’ve built up your capital, you’ll need to invest it for income. One way of doing this is to invest in individual stocks listed on the stock market. There are plenty of companies in the UK stock market which provide relatively healthy dividends. although it may be worthwhile investing into well established companies such as those listed on the FTSE 100 (known as the biggest market caps companies in the UK) though high yields are not necessarily the only indicator you should look at when selecting investments.
Further information can be found on the London stock market website, being https://www.londonstockexchange.com/, I personally use https://www.dividenddata.co.uk/dividendyield.py?market=ftse100
There are some well established companies based in the UK with some excellent yields and a successful track record on increasing dividends year on year.
At present the FTSE100 has an average yield of 3.25%
What factors should I look for when choosing stocks !
You may wish to consider the dividend cover of a stock, which is the amount by which its earnings cover its dividend. This is given as a multiple, for instance a dividend cover of 2x means that annual earnings are two times bigger than annual dividends, which suggests a company can continue to pay out its dividend unless earnings fall by 50%
If a company has a dividend cover close to 1x, it may be skating on thin ice in terms of its income payments, because any reduction in earnings could well mean having to cut the dividend, or fund it by taking on more debt. Or the dividend could be reduced or stopped if company trading is poor or uncertain moving forwards. Which is the last thing you need if you are investing in a certain company to receive passive income.
What about other factors !
Other considerations when picking income shares is dividend volatility and dividend growth. Some sectors have more volatile dividends than others and some sectors can appear to cyclical during good and bad times.
Future dividend growth should also be factored into investment decisions. A company with a high stable dividend may give you good returns today, but if the dividend remains flat over time and isn’t increased profits grow. Your future income return is being eroded by inflation.
If a company which has a good track record of growing its dividend can offer you some protection here, though there is of course no guarantee it will continue to do so indefinitely into the future. Stocks with higher dividend growth potential tend to come with lower starting yields in the early years, but will become established one time as the company grows.
When starting out with individual stocks it may be worthwhile to buy shares across numerous sectors so you don’t have all shares in insurance, banks or utilities. Buy you have numerous shares across a few different sectors, eliminating your risk.
You may also consider the frequency of when dividends are paid out, most companies will pay out an interim and final dividend. Some companies win the UK will pay out quarterly dividends such as BP, Shell, HSBC to name a few.
Record and track your dividends !
Also create some kind of calendar or simple spreadsheet so you know when your dividends are being paid out. Do you receive dividends in the same months, or no months at all. Or do you receive a steady supply across numerous months throughout the year.
Remember to re-invest all your dividends !
If you want to improve your portfolio size and the amount of dividends that you receive. Remember to re-invest all your dividends back into your portfolio, through the power of compounding it will have a substantial effect on your portfolio in later years. You may only receive small dividends when starting out but this will will soon improve over time.
If I receive a dividend less than £ 50 from a specific company, I will keep that money in cash and will invest soon afterwards when new contributions are added to my portfolio. This will reduce my dealing costs as I deem it expensive and unnecessary.
When I receive a dividend over £ 50, I will automatically instruct my platform provider new shares in that company through something called “dividend re-investment“. This will will be done 2 days after I receive initial dividend at a reduced cost of £ 1.50 per trade irrespective of size. This action will increase my dividend at next payment as I should own more shares, but if the company is growing the dividend payout is also increased. I can set this up quite easily online by ticking a simple box on my platform providers website.
What about income funds !
If you aren’t comfortable picking your own shares, you may invest in a simple equity income fund. These funds will hold around a minimum of 30 listed companies across numerous sectors. With the aim of providing a greater level of diversification, to protect you from problems in one company or sector damaging your wealth, if it performs badly.
You will may be nervous or apprehensive about picking your own investments in the early days of your foray into investing. But this action could prove to be beneficial when starting out, then once your investing knowledge increase you may invest directly into individual stocks and shares.
Your platform provider will have a list of income funds that they will recommend to clients to assist you. It will provide details about fees and charges, what fund they hold within the portfolio, What sectors they invest in and the amount and frequency of when dividends are paid out to retail investors.
I personally use http://ajbell.co.uk as platform to hold my investments, as their fees are competitive. They offer great background information when doing research into new shares or funds, ETF’s etc. They also provide excellent webinars and investment videos so I can improve my market knowledge and have simple guides to help investors about numerous investments matters.
So how has my own ISA created passive income for me in recent times !
| YEAR END VALUATION | ANNUAL CONTRIBUTIONS | ANNUAL RETURN % | ANNUAL DIVIDENDS | |
| 2018 | 4,253 | 1101 | 5.00 | 206 |
| 2019 | 17,485 | 11622 | 29.32 | 252 |
| 2020 | 33,960 | 15000 | 14.54 | 129 |
| 2021 | 59,723 | 20556 | 18.90 | 526 |
| 2022 | 71,352 | 18154 | -5.22 | 1,534 |
| 2023 | 89,749 | 9855 | 14.78 | 2,527 |
| 2024 | 122,988 | 12383 | 22.38 | 4,048 |
| 2025 – YTD | 150,689 | 10737 | 15.00 | 3,156 |
| TOTALS | 99,408.00 | 14.33% | 12,378.00 | |
As highlighted above, the table shows the amount of passive income that I have received within my ISA account. The amount received has increased year on year with the exception of 2020 when I only owned individual stocks and dividends were mainly suspended during the COVID pandemic.
For 2024 we received £ 4048 for the complete year so average monthly payment of £ 337, we currently own 10 shares with average yield of 5.20%. In recent times we have diversified our holding so we now own 10 shares and 10 funds with about about 50% split equally between funds and shares. For 2025, we shall receive over £ 5,000 in dividends.
If I was to cover my personal pension (SIPP) into this equation the figure is over £ 12,000 per annum, which is £ 1,000 per month that I receive in passive income from these 2 sources alone.
The chart is not to boast or brag and say look at me, but it’s to give people hope that your portfolio may start start off slowly at first. But remember if you invest regularly and think long term you can build up a sizeable portfolio over 6 figures.
If you are going to get invest on a regular basis, remember to hold your investments within a tax free wrapper such as an ISA or personal pension. As all investments are free from capital gain tax if you sell them. Also all your dividends that your receive are free from dividend tax and don’t have to be declared to HMR or through self-assessment. So saves unnecessary expense and administration.
Remember:
If you like this blog post, check out my other posts on https:moneyminted.co.uk which covers savings, investing, pensions and investment book s that I recommend. So you too can improve your investing knowledge, financial education, and reach your financial goals in future.
It’s not a get rich quick scheme but you will get their in the end, if you create an actieon
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