The beauty of generating a passive income is that you don’t have to get out of bed to earn it. It keeps rolling in while you sleep.
The trick, of course, is finding one. Millions now have side hustles, generating an average £872 a month, according to Finder.com. The downside is obvious. You only earn while you’re awake and working.
There’s one alternative that many people overlook but we rate highly at The Twelfth Magpie: investing in FTSE 100 and FTSE 250 shares.
Many newbie investors see the stock market purely as a way of making money through rising share prices. But that’s only half the story. Most FTSE companies also reward shareholders with regular dividends, typically paid twice, sometimes four times a year. That’s where the passive income comes in.
How FTSE shares can make investors rich
Today, the average dividend yield on the FTSE 100 is around 3%. Add that to any share price growth and your returns really start to compound, especially if you reinvest those dividends to buy more shares. Those extra shares then generate more dividends, which buy even more shares, creating a virtuous circle.
Most companies aim to increase dividends over time, which makes the effect even more powerful. Eventually, you can switch from reinvesting those payments to taking them as a second income in retirement, while leaving your capital invested to keep growing.
Better still, if you hold those shares inside a Stocks and Shares ISA, every penny of dividend income is tax-free. That’s a big advantage over a side hustle, where income above £1,000 a year has to be declared.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Someone earning an average 4% dividend yield needs a portfolio worth roughly £261,600 to generate £872 a month in passive income. That sounds daunting, but investing £200 a month for 30 years could build a portfolio worth around £294,000, assuming an average annual return of 8%.
It’s also possible to target yields well above the FTSE 100 average by selecting individual dividend stocks rather than simply tracking the index.
Check out this mighty dividend yield
One FTSE 100 share that’s caught my eye is banking group Investec (LSE: INVP). It’s recently rejoined the blue-chip index after its shares surged 145% over the last five years.
The group has successfully transformed itself from a specialist lender into a broader bank with a growing wealth management business. Annual profits have climbed from £687m in 2022 to £951m in its 2026 full-year results.
The trailing dividend yield is an impressive 5.84%, while the shares still look reasonably priced with a price-to-earnings ratio of just 7.8. That’s roughly half the FTSE 100 average.
There are risks, of course. Around half of Investec’s profits come from South Africa, exposing results to currency swings (it reports in sterling). Like every bank, it’s benefited from today’s higher interest rates, which have boosted lending margins. If rates start to fall, that could reverse.
After such a strong run the shares may pause for breath, but I still think they’re worth considering as part of a diversified passive income portfolio.
Should you invest £5,000 in Investec Group right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Investec Group made the list?
Harvey Jones does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
