How shares can generate passive income for life

Happy Wednesday! Welcome to the last day of the 2022/23 tax year. As the tax year rolls into 2023/24 tomorrow, I thought I’d use this milestone to discuss passive income.

Passive income comes from activities other than work. It comes in many forms and includes, for example, savings interest, bond interest, rental income, occupational and state pensions, and more.

Favorite form of passive income

My hero, investment genius Warren Buffett, once warned, “If you don’t find a way to make money while you sleep, you’ll work yourself to death”.

After these wise words, my investment strategy was built with increasing income to support me and my family for the long term. Also, I aim to be richer, so I buy shares to gain capital in the future (profit from selling shares at a higher price).

Therefore, the #1 form of unearned income is cash dividends paid by the company to its shareholders. Unfortunately, not all UK-listed companies pay dividends – but most members of the elite do FTSE 100 index do.

Big problem with dividends

Now for some bad news. Not only do many companies not pay dividends, but future cash payments are uncertain or not guaranteed.

Indeed, during tough times and downturns, businesses will cut or cancel these payments to conserve cash. More recently, many companies have eliminated or reduced dividends during the ‘pandemic panic’ of 2020/21.

Create a high yield portfolio

So how do you create stable and growing passive income from stock dividends? I manage my risk by spreading my money around, so that I don’t have too many eggs in one company’s basket.

For example, starting in mid-2022, my husband and I have created a new portfolio to generate additional income (and profit) for us. In the second half of last year, we bought 17 different stocks to achieve this goal.

However, investing for income is not a one-time, ‘fire and forget’ strategy. However, this is a dynamic process, where we continue to buy lower and higher yielding stocks.

Also, investing is like gardening – we have to grow flowers and pull weeds. If we sit back and do nothing, our portfolio can stagnate and even decrease in value. That’s why I’m always looking for cheap, undervalued, and low dividend stocks to buy for the long game.

For example, our most recent purchases include stakes in two Big Four UK banks, a leading UK asset manager, a major European telecommunications group, a global mega miner, and two well-known insurance companies.

One of the cheap and easy ways to invest

In summary, by investing in various companies and industries, we hope to create a stable and substantial source of passive income to support us throughout our lives.

However, if I don’t want to pick stocks myself, I can let ‘Mr Market’ do the work for me. Indeed, my husband has invested large sums in low-cost index-tracking funds to get consistent returns, for example, UK stocks and US stocks.

And by investing in hundreds or even thousands of companies with a few clicks, my husband sleeps easier knowing his money is working hard day and night!