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Since June of last year, my wife and I have repeatedly used our spare capital to snap up undervalued shares on both sides of the Atlantic. During our 15-month buying spree, we acquired seven new US stocks, 15 FTSE 100 shares, and five FTSE 250 holdings. And our strategy is heavily weighted towards generating additional passive income.
Who doesn’t love passive income?
As a laid-back guy, I’m a big fan of letting my money work harder for me. And one way to do this is by making extra passive income — earnings that don’t come from paid work.
For example, these forms of second income include cash interest from savings, plus coupons (interest) from government and corporate bonds. Other types include rental income from property, as well as cash dividends from owning shares.
But my favourite additional income by far is the rewards I receive for being part-owner of various businesses. After buying shares in listed firms, I like to sit back and watch my dividends roll in. And over the years, these trickles can turn into a tumbling torrent of fresh cash.
Six shares I own for dividend income
The big problem for income investors (including me) is that not all UK-listed shares pay dividends. Indeed, the vast majority of shares listed in London don’t pay any dividends at all. Some of these companies are loss-making, while others plough their profits back into future growth.
However, almost all companies in the UK’s blue-chip FTSE 100 index pay dividends to their shareholders. And that’s mainly why 15 of our newest shareholdings are Footsie firms.
To show you what I mean, the following shares offer the highest levels of passive income in our new portfolio. This table is sorted from highest to lowest dividend yield.
|Phoenix Group Holdings
|Legal & General Group
These mouth-watering cash yields on offer range from over 8% to 11% a year. Across all six stocks, the average dividend yield comes to 9.5% a year. That’s roughly double what I could earn in a table-topping deposit account.
Dividends aren’t 100% safe
Now for the bad news. Unlike savings interest, dividends are not guaranteed. Therefore, they can be cut or cancelled at any time. Indeed, during the coronavirus crisis of 2020/21, dozens of leading UK companies slashed or suspended their cash payouts.
Also, when companies do decide to take an axe to their dividends, their share prices can plunge. That’s why I am sometimes wary of double-digit dividend yields, as history has taught me that these rarely last long.
Finally, while some companies may cut their cash payouts, the better performers will raise theirs. With any luck, my winners will outweigh my losers and improve my long-run returns. And that’s why I’m hopeful that the six shares shown above will deliver me a juicy passive income over the years ahead!