Stock market

How would I hope to turn £1,000 into £10,000 with passive income shares?

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gave London Stock Exchange Celebrated for being a great place to find passive income shares. While profits are never guaranteed, in investing FTSE 100 And FTSE 250 Companies can provide significant profitable income over a long period of time.

Just look at the huge shareholder payouts Lloyd’s, Aviva, And Vodafone has delivered in recent decades. Other businesses like Diageo, The Ashted Group, And Bunzl provide low returns in relation to their share price. But they have long and impressive records of payout growth.

Not all dividend paying stocks will prove to be wise investments. So how do investors decide which companies to pile into and which to avoid?

Five of the best

I’ve created a checklist of things to consider when deciding which dividend stocks to buy. The list is long, but some of the main things I see are:

1. Date of profit. Past performance is not a reliable indicator of future returns. But businesses that pay consistent dividends over many years often demonstrate financial resilience and a commitment to returning cash to shareholders.

2. Dividend payout ratio. It measures the proportion of a company’s revenue that is paid out in the form of dividends. A low payout ratio may indicate that the business has room to continue to grow cash rewards.

3. Earning potential. I will look for companies that can grow earnings over time, and often businesses that operate in defense sectors. This gives them the stability to pay dividends even when economic conditions deteriorate.

4. Financial strength. A strong balance sheet and solid cash flow can support consistent dividend payments over time. Debt levels, capital expenditures, and free cash flow are all worth noting.

5. Dividend yield. A high yield can be a sign of an unsustainable dividend if not supported by profits or cash flow. But choosing high-yielding stocks enables investors to reap significant compounding gains by reinvesting large dividends over time.

A high dividend stock I bought.

A company can score very high on many of these points. But that doesn’t necessarily mean I’ll buy it for my portfolio.

When I invest, I look for passive income stocks that have the opportunity to grow in value over time. This way I can maximize my return by getting solid capital gains along with dividend income.

So I bought shares. Legal and General Group (LSE:LGEN). Its share price hasn’t risen in recent years, but it’s up 173% from 20 years ago.

Legal & General's share price performance since 2004.
Source: London Stock Exchange

I believe Legal & General’s share price will also rebound before too long. It has an excellent opportunity to grow its income as the Western population ages rapidly and demand for pensions, life insurance, and investment products increases.

There is always the risk that sales may stall or reverse in the near term if economic conditions remain tight. But I don’t expect it to affect profitability.

The FTSE 100 company is an outstanding cash generator, and had a Solvency II capital ratio of 224% at the end of 2023. That undercuts City’s expectations for further dividend growth over the next few years, and a consequential dividend yield of 8.4% for 2024.

I think investing £1,000 in legal and general shares now could eventually turn into a return of £10,000.

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