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Probably the easiest way to generate passive income from stocks is to hire a FTSE All Share Index tracker.
That would give me exposure to all the share price growth and dividend income generated by the 600 largest stocks on the London Stock Exchange.
UK stocks offer some of the highest yields in the world. Today, the FTSE All-Share offers a yield of 3.58%. That is comfortably above the 1.32% yield of the overall EU equity index. S&P 500 IndexNew York can beat London on share price growth, but it can't match it on revenue, and that's what I'm looking for here.
Phoenix Group Holdings can fly
Personally, I prefer to buy individual UK stocks as this allows me to generate even more dividend income.
The top performing stock in my self-invested personal pension fund, and one of the top performing stocks in the world. FTSE 100 Index – is an insurer Phoenix Group Shares (LSE: PHNX). It currently offers a spectacular yield of 9.31%.
Sky-high returns can be fragile, but Phoenix’s performance appears sustainable. The board has increased shareholder payouts in seven of the past nine years. In the other two, it froze them (and one of those years was the pandemic, so that’s understandable).
Dividend-paying stocks need to generate a lot of cash and Phoenix looks broadly solid. Last year it aimed to generate £1.8bn of cash and it made £2bn.
It operates in a competitive market, where rising inflation has pushed up claims costs. I don't expect Phoenix's share price to skyrocket, but it may rebound as interest rates fall and savers get less income from cash and bonds.
Dividends from all shares
Buying individual stocks isn't for everyone. A low-cost tracker like the Vanguard FTSE UK All Share Index Unit Trust It spreads the risk and at the same time offers a decent second income. There are no initial fees and the commission is minimal, at 0.06% per year.
Let's say I've had enough of writing about stocks and I want to retire in them. A single pensioner needs £31,300 a year to have a “moderate” income, according to the Pensions and Lifetime Savings Association.
I am set to take the new full state pension, which is currently worth £11,502. That leaves me needing another £19,798. To generate that amount solely from a FTSE All-Share index tracker, I would need to have a total of £553,016, given the current yield of 3.58%.
It's a considerable sum, but it shows how much money we need to save to have a decent retirement. It's important to start early.
If I invested £250 a month and grew that amount by 5% each year, after 30 years I would have £528,095, so I would be pretty close to my target. This means my portfolio has an average return of 7% per year after charges, in line with the long-term returns of the FTSE index.
If I wanted to stop working before retirement age, I'd need even more in my track record. Investing is the best way I know to generate a second income, but as my numbers show, it can't be done overnight. That's why I buy individual stocks, to speed up the process. By doing so, I hope to exceed my passive income goal in style.
