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I think passive income is great, because I don’t have to work for it. It just comes rolling in, even as I sleep. Take these two comments from acclaimed billionaires:
1. Legendary investor and philanthropist Warren Buffett, warned, “If you don’t find a way to make money while you sleep, you will work until you die”.
2. American business tycoon JD Rockefeller quipped, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in”.
The first quote — from my investment hero, the 95-year-old ‘Oracle of Omaha’ — has guided me for decades. But the second quip makes me wonder about Rockefeller, who got more joy from money than from his closest relatives and relationships?
Easy money?
Here are five well-established ways to collect passive income:
1. Income from property (by being a buy-to-let landlord) — far too challenging and time-consuming for me.
2. State and company pensions — only accessible to people of a certain age.
3. Savings interest — safe, but I know no-one who got rich by sticking solely with cash.
4. Interest from government and corporate bonds — less risky than owning shares, but not risk-free.
5. Share dividends — one of the riskiest (and most lucrative) ways of generating non-work income.
£1,000 a year
How to start building a portfolio of company shares for powerful passive income? Here’s what I recommended to my son (maths whizz and programmer) and daughter (trainee doctor), both starting their chosen careers.
Try to save £3 a day, perhaps from skipping one cup of coffee. Over a week, this comes to £21. Over a 365-day year, it comes to £1,095. For easier calculation, we’ll drop this to £1,000 a year. Each year, invest this £1k into a single share (or low-cost fund to achieve instant diversification) paying decent dividend yields. Repeat every year.
How much might they have after 40 years? Growing at 7% a year, the final pot would be worth almost £200k. Wow, that’s the power of compound interest. But the real trick is to keep adding more money to this simple strategy, which has made so many people rich.
Unfortunately, taxes and ongoing charges gobble up money over the years, reducing this final sum. Thus, it’s also important to minimise ongoing expenses and maximise use of tax-efficient vehicles.
A dividend dynamo
My family portfolio owns M&G (LSE: MNG) shares for dividend income. As I write, this FTSE 100 stock trades at 275.9p, delivering a dividend yield of 7.3% a year and valuing this group at £6.6bn.
However, share dividends are not guaranteed, so can be cut or cancelled suddenly. Even so, M&G’s payout has risen from 18.23p in 2020 to 20.1p in 2025, up 10.3% in four years. Also, this share is up 36.5% over one year and 41.1% over five years. This capital gain is an added bonus for income investors.
Founded in 1931, M&G launched the first unit trust that year. Today, the company manages money for over 5m clients worldwide. But what about when times turn tough? With financial markets hitting record highs, the next market meltdown could be brutal for asset managers, including M&G. Its revenues, profits, and cash flow could suffer in the next stock-market crash.
That said, M&G has billions in spare capital to help pay future dividends. But there are far spicier shares out there!
