5 potential problems with building passive income
As an older Fool, I love generating passive income. One of my main goals is delivering unearned income for my family. But like work itself, producing passive income is no pushover. In my working and investing life, I’ve encountered these five problems with building passive income:
1. Time and effort
Like everything worthwhile, making and managing money is not easy. It takes time and effort, often with significant upfront work. Also, making better financial decisions means understanding the pitfalls and rewards of money management, which can be boring.
2. Continuous upkeep
Once a plan is in place, it requires constant (even lifelong) commitment. Making extra income is not ‘fire and forget’. This endless maintenance is why my wife and I never became property landlords. We just couldn’t face dealing with tenants, repairs, etc.
3. Initial investment
Making extra financial income often requires some initial investment, because there’s rarely such thing as a free lunch. But making money from, say, stocks and shares doesn’t require a fortune. When I started investing in the 1980s, my yearly purchases probably totalled a couple of hundred pounds. However, this strategy snowballed over decades to improve our lives immeasurably.
4. No guarantees
The future is inherently uncertain. It’s impossible to predict what might be just around the corner, never mind in 10 or 20 years. Investing for income is a long game with no guarantees of success. Then again, a disciplined and long-term approach usually reaps rewards — but not for owners of Russian shares when the revolution came in 1917!
5. Risk of loss
As one old saying goes, the greater the risk, the greater the reward. But taking huge risks can cause a ‘permanent capital loss’ (losing more than is affordable). For example, I once lost £675,000 in 13 months on a single share that went to zero. This caused me great pain, but taught me lucrative lessons about taking excessive risks.
Delightful dividends
My family portfolio generates plenty of passive income from shares, plus some interest from highly rated bonds. Right now, we own maybe 30 different US stocks and UK shares, mostly for their dividend income.
Alas, share dividends are not guaranteed, so they can be cut or cancelled at short notice. That’s why I buy into solid businesses with good dividend histories, such as FTSE 100 firm Legal & General Group (LSE: LGEN).
Legal & General is one great British business I truly admire. Founded in 1836, today it is a leading provider of UK life assurance, long-term savings, and investment products. It currently manages over £1.1trn of assets for individuals and institutions.
This company has an enviable dividend record. In 2014, the dividend was 13.4p a share. This reward has risen every year since, except for Covid-wracked 2020, when it was unchanged from 2019. In 2024, the payout was 21.36p — up 59.4% in nine years.
As I write, this stock trades at 241p, valuing the group at £13.7bn. Its dividend yield is a whopping 8.9% a year, one of the very highest in the London stock market.
I suspect that in the next financial meltdown, L&G shares will take a beating as its earnings and cash flow fall. But the company has billions of pounds in reserves to keep paying dividends, so I hope to own this stock in perpetuity!
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The Motley Fool UK has no position in any of the shares mentioned. Cliff DâArcy has an economic interest in Legal & General Group shares. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.
