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There are many ways to try to generate passive income to help fund our retirement years.
However, many of them seem a bit random to me. Or require a lot of work to set up in the first place.
My best option is to buy UK shares in a stocks and shares ISA and leave them there for as long as possible.
The UK stock market, over the last century and more, has far outperformed other forms of investment.
Longer = better
Nothing is guaranteed, of course, not like a cash ISA. But the more I invest, the lower the risk of stocks and the higher the returns I expect to get.
And it really doesn’t require much work. In fact, I don’t even need to get up from my desk; all I need to do is move my computer mouse and make a few clicks. It’s easier than playing. Condemn.
Okay, I know, the hard part is choosing which stocks to buy. And yes, it can take some time to learn how to do it.
So today I will explain to you how I do it. However, it’s just me and other investors need to know their own risk taking and choose their own strategy.
<h2 class="wp-block-heading" id="h-dividend-stocks“>Dividend stocks
If we want passive income, that means dividend stocks, right? Well, that seems like the obvious way, and it’s what I’m looking for.
But I know someone who retired with a portfolio of growth stocks, including companies like Apple (which produces only a very small output). You simply sell a few shares each year and make your passive income each month from the cash.
But distributing dividends seems like less work, since the money arrives at regular intervals.
So looking for the highest dividend yields? Wow, time to be careful.
Great yields
Sometimes the yield is high because a company is facing problems and the share price has fallen, and the dividend is likely to be cut sharply.
Sometimes a sector is cyclical, with dividends rising and falling. Rio Tinto taken to the FTSE 100 a couple of years ago with a double-digit performance. The forecast has now dropped to 6%; remains good, but could fall further as mining profits look set to decline.
And then some offer big dividends and don’t seem to have the profits to pay them.
Vodafone 11% comes to mind, but the stock price is down 55% in five years. Oh, and the company, like BT GroupHe has huge debts.
Three things
So what am I looking for? Three things, mainly.
First I want to see good and growing dividends. Not necessarily the biggest right now, but I think they should do well in the long term.
Then I want to look at companies with strong profits and good cash generation, so I can clearly see how they can continue to pay.
And finally, I stay away from companies with large net debt.
Right now, I’m primarily looking at banks, insurance companies, and home builders for 2024.