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Earning passive income in the stock market’s pretty straightforward. All investors have to do is buy shares in a business that pays dividends, then just sit back, relax, and watch the money roll in.
Of course, in practice, this strategy doesn’t always work out as expected. That’s because dividends aren’t guaranteed. And sometimes, even when a stock promises to pay a high yield, that income never materialises, luring investors into a trap.
Fortunately, there are several sneaky tactics investors can use to avoid these pitfalls. So with that in mind, how much passive income could someone with £20,000 realistically earn from stocks?
Dividends from the FTSE 100
Let’s start with the most popular stock market investing strategy in Britain – index funds. Rather than picking individual stocks, investors can simply invest in a FTSE 100 tracker, or similar, gaining an instantly diversified portfolio that generates passive income.
So how much can investors expect to make with this strategy?
Historically, the FTSE 100’s generated a total return of around 8% a year over the long run, with half of that coming from dividends. However, in 2025, with UK large-cap shares reaching record highs, the yield’s actually a bit lower, at 3.2%.
That means a £20,000 investment will generate a dividend income of £640 today – assuming, of course, that dividend payouts aren’t suddenly cut tomorrow. That’s certainly nothing to scoff at. But investors can potentially do much better.
The power of stock picking
Even though the FTSE 100 is only offering 3.2% today, the story’s quite different for some of its constituents. Take Legal & General (LSE:LGEN) as a perfect example to consider.
Today, the life insurance giant’s paying out a jaw-dropping 9.1% yield! That’s the highest in the index, and with £20,000, it’s enough to unlock £1,820 a year – almost three times as much as index investors.
However, as previously mentioned, high yields can be deceiving. So is this payout actually sustainable?
A clever strategy investors can use here is to examine what’s going on with cash flow. After all, this is what ultimately funds shareholder dividends. In the case of Legal & General, things are looking a little shaky.
Higher interest rates have been a powerful tailwind in recent years, boosting demand for its pension products. But with interest rates steadily falling, that tailwind is slowing down. And its once thriving pension risk transfer (PRT) business looks like it’s losing its steam.
As a financial institution, Legal & General continues to look strong with a robust capital reserve that far exceeds the regulatory requirements. But from a cash flow perspective, there are growing concerns that a slowdown in the PRT market could compromise payouts.
Is it worth the risk?
Management isn’t blind to the potential slowdown. And it’s already making moves to restructure the business to be more capital-light, offsetting lower revenue with higher margins to maintain cash generation.
In other words, the 9.1% yield could indeed be sustained, unlocking an impressive payout for investors. But this comes with significant execution risk – something investors will have to consider carefully before jumping in.
Personally, the risk profile is a tad too high for my tastes. But luckily, there are plenty of other FTSE 100 stocks offering elevated yields that could be here to stay.
