Why it doesn’t pay to be passive when it comes to income shares

Warren Buffett is just one of many famous investors who are fans of passive income. As the billionaire ‘Oracle of Omaha’ once said: “If you don’t find a way to make money while you sleep, you will work until you die.”

However, as attractive as it might sound to earn some cash while doing nothing, there are some common pitfalls I think are worth bearing in mind when considering dividend shares.

Do your own research

First, it pays not to be ‘passive’ when choosing which ones to buy. Upfront effort and plenty of research are likely to be rewarded.

For example, a stock might have an apparently attractive yield because investors are wary. A falling share price – often a sign of a loss of confidence – could push a yield higher, even if a dividend is cut. For this reason, I think it’s important to look at a company’s recent stock market announcements and annual reports.

I also believe it’s worthwhile to study recent payouts. Although there can never be any guarantees, a business with an impressive track record of steadily increasing its returns to shareholders is more likely to continue doing so than one with a more erratic payment history.

Given that dividends are paid out of earnings, it makes sense to me to use the same criteria when selecting both income shares and growth stocks. These include a company’s competitive advantage, how innovative it is, and whether it has a strong balance sheet.

But some high-growth companies prefer to use the surplus cash they generate to drive further expansion rather than to reward shareholders through dividends. Many of the world’s most valuable companies, such as Nvidia and Apple, have tiny yields. Some, like Tesla, have never paid a dividend.

And even when a stock’s been chosen, I reckon it’s important not to be too passive. Keeping an eye on company and industry announcements could help provide some clues as to whether a payout might be cut.

So where does this leave those of us who like to own shares offering decent levels of passive income? Personally, I think there are plenty of good examples on the FTSE 100.

Close to home

My own favourite is Legal & General (LSE:LGEN). With the exception of one year (during the pandemic when it kept its dividend unchanged), the pensions and savings group’s increased its payout annually since the global financial crisis. From 2025-2027, it’s pledged to increase it by 2% a year.

It’s now one of the UK’s largest financial groups with £1.1trn of assets under management.

But as with any stock, there are risks. The group operates in an increasingly competitive industry with some smaller challengers looking to take market share. It also remains a major holder of global equities and bonds. This makes it vulnerable to a downturn in world stock markets.

However, its pensions business is likely to benefit from demographic and regulatory changes, with the responsibility for saving for retirement shifting from employers to individuals. And compared to 2024, it expects to grow 2025 core operating earnings per share at the “higher end” of its 6%-9% target.

Of course, there are plenty of other income shares to look at. But due to its impressive track record and solid prospects, I think Legal & General’s one to consider.

The post Why it doesn’t pay to be passive when it comes to income shares appeared first on The Motley Fool UK.

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• Here’s how much passive income £10,000 worth of Legal & General shares could deliver in 2026
• 3 FTSE 100 powerhouses to consider buying for passive income in 2026

James Beard has positions in Legal & General Group Plc. The Motley Fool UK has recommended Apple, Nvidia, and Tesla. 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.

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