Probably the simplest way to generate passive income from shares is to take out a FTSE All-Share tracker.

That would give me exposure to all the share price growth and dividend income generated by the 600 biggest shares on the London Stock Exchange.

UK shares offer some of the highest yields in the world. Today, the FTSE All-Share yields 3.58%. That’s comfortably above the 1.32% yield on the S&P 500. New York may beat London for share price growth but can’t match it for income and that’s what I’m after here.

Phoenix Group Holdings can fly

Personally, I prefer to buy individual UK shares as this allows me to generate even more dividend income.

The highest yielding stock in my self-invested personal pension – and one of the highest on the entire FTSE 100 – is insurer Phoenix Group Holdings (LSE: PHNX). It now yields a blockbuster 9.31%.

Sky-high yields can prove fragile. Yet the Phoenix yield looks sustainable. The board has increased shareholder payouts in seven of the last nine years. In the other two, it froze them (and one of those years was the pandemic so that’s understandable).

Dividend stocks need to generate plenty of cash and on the score, Phoenix looks solid. Last year, it targeted £1.8bn of cash generation, and made £2bn.

It’s operating in a competitive market, where rising inflation has driven up claims costs. I don’t expect the Phoenix share price to shoot the lights out, but it may pick up as interest rates fall and savers get less income from cash and bonds.

All-Share dividends

Buying individual stocks isn’t for everyone. A low-cost tracker like the Vanguard FTSE UK All Share Index Unit Trust spreads the risk while still offering a decent second income. It has no upfront fee and a rock-bottom charge of 0.06% a year.

Let’s say I’ve had enough of writing about shares and want to retire on them instead. A single pensioner needs £31,300 a year to have a ‘moderate’ income, according to the Pensions and Lifetime Savings Association.

I’m set to get the full new State Pension, currently worth £11,502. That leaves me needing another £19,798. To generate that purely from a FTSE All-Share tracker, I’d need to hold a total of £553,016 given today’s 3.58% yield.

That’s a hefty sum but shows how much we all need to tuck away to fund a decent retirement. It’s important to start early.

If I invested £250 a month and increased that by 5% every year, after 30 years I’d have £528,095. So I’d be pretty close to my target. This assumes my portfolio returns 7% a year after charges on average, broadly in line with the long-term FTSE return.

If I wanted to stop work before retirement age, I’d need even more in my tracker. Investing is the best way I know to generate a second income but as my figures show, it can’t be done overnight. That’s why I buy individual stocks, to speed up the process. By doing so, I hope to beat my passive income target in style.