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US billionaire Warren Buffett once warned, “If you don’t find a way to make money while you sleep, you will work until you die”. Hence, maximising my passive income is a major goal.
Types of unearned income include savings interest, bond coupons, and property income. But my favourite is share dividends — regular cash payments from companies to their owners.
Delightful dividends
As my wife and I both work, passive income is a side hustle. But, come retirement, we will rely on passive income to fund our lifestyle.
Now for two problems. First, future dividends are not guaranteed, so they can be cut or cancelled suddenly. Indeed, many businesses did this during 2020-21’s Covid-19 crisis. Second, most UK-listed companies don’t pay out dividends. Some are loss-making with no cash to spare, while others reinvest their profits to accelerate future growth.
Powerful passive income
That said, the UK’s main stock-market index — the FTSE 100 — is packed with businesses paying generous dividends to shareholders. While the Footsie‘s average dividend yield is 3.6% a year, dozens of shares offer cash yields exceeding this.
For example, these three stocks — all owned by my family portfolio — offer some of the highest dividend yields in London:
| Company | Phoenix Group Holdings | M&G | Legal & General Group |
| Market value | £5.1bn | £5.1bn | £14.3bn |
| Share price | 506.5p | 212.86p | 242.72p |
| Dividend yield | 10.5% | 9.3% | 8.5% |
| One-year return | 0.8% | -5.1% | 1.7% |
| Five-year return | -35.7% | -13.0% | -22.7% |
Note that all three companies are in the same line of business: asset management and insurance. They are substantial businesses, with market valuations ranging from £5bn to £14bn. Nevertheless, I would never build a portfolio solely from these three shares, as this would be highly concentrated and hardly diversified at all.
The above dividend yields range from 8.5% to 10.5% a year, with the average from all three being 9.4% a year. That’s over 2.6 times the FTSE 100’s cash yield. But paying out high dividends can leave companies short of growth — note that all three share prices have fallen over the past half-decade.
My pick of this bunch
While I think all three companies are fine firms, the cream of this crop in my view is Legal & General Group (LSE: LGEN). During my long career in financial services, I came to genuinely admire this firm and its business model. Founded in 1836, L&G has grown over 189 years to become a stalwart of UK asset management and insurance.
This group is made up of three business divisions: asset management, institutional retirement (workplace pensions), and retail (individual pensions and insurance policies). At end-2023, the firm managed a whopping £1,159bn of financial assets, making it a leading European asset manager.
In its latest results, L&G revealed that its pension risk transfer business is going great guns. Also, it is selling its US insurance business to a Japanese insurer for $2.3bn (£1.8bn). The group also announced a £1bn share buyback and aims to return £6bn to shareholders through dividends and buybacks over the next three years. Nice.
Then again, L&G’s future profits and cash flow are heavily driven by the fickle tides of financial markets. Thus, if and when share and bond prices crash again (as in 2022), this juicy dividend could be threatened. Still, we hope to reap this potent passive income for many years to come!
