Building a passive income stream of £50,000 a year would set anyone up for life. But money like that doesn’t come easy. It takes a lot of time and dedication… and a tenner a day. With £10 a day invested into a diversified portfolio of dividend shares and growth stocks, the compound returns can add up quickly!
The FTSE 100 has been providing average annual returns of 8% since it began. In the US, the S&P 500, is even better, returning about 11% on average (with dividends reinvested). While US stocks tend to have better price appreciation, UK stocks often offer higher dividends. They each have benefits and diversifying into both reduces risk from a localised economic issue.
A mega-cap UK dividend stock
HSBC (LSE: HSBA) is one example of a massive UK company that pays a high dividend. Shares are only £6.87 and it currently sports a 7% yield, so it pays out an extra 48p per share annually. But the share price is volatile, flipping between £4 and £10 over the past 20 years. This occasionally affects dividend payments — in 2020, the yield fell below 1%.
Still, growth is up 250% in the past 30 years with an annualised return of 4.2%. With the current dividend, it’s about 11%.
But bank stocks are particularly vulnerable to economic instability. A financial crisis could send the stock plummeting, negating any gains from the dividends. That’s why it’s important to diversify into various industries. Investors might also consider Aviva or Taylor Wimpey, two well-established UK dividend stocks with yields near 7%.
A well-established US favourite
When looking for long-term passive income, a reliable growth stock like McDonalds (NYSE: MCD) is worth considering. Trendy tech like AI is fleeting but fast food has stood the test of time. Since 1994, the world’s most famous drive-thru restaurant has delivered an average annualised return of 9.9%. It also has a small but decent 2.6% dividend yield.
However, it faces stiff competition from rival joints like Wendy’s, Burger King, and Taco Bell. It recently launched a $5 value meal to combat inflation but may need to do more if it hopes to stay relevant. The stock is up only 23% in the past five years, compared to 110% growth between 2015 and 2020.
PepsiCo is another strong US growth stock to consider, up 991% in the past 30 years with annualised returns of 8.3%.
Calculating returns
With a mix of high-yield UK dividend shares and high-growth US shares, I think it’s realistic to expect an average 5% dividend yield and an 8% annual share price increase. By investing just £10 a day into that portfolio and reinvesting the dividends, the pot could grow to £1,075,216 in 30 years (yes, that’s one million).
Quick maths can calculate that a dividend yield of 5% on a £1m investment would pay out £50,000 a year.
But nobody can predict what might occur in 30 years. Stock markets can fluctuate wildly, and the final return could be far less – or more. Keeping an eye on current events and occasionally rebalancing the portfolio may be necessary to keep it on course.
This post was originally published on Motley Fool
