There are plenty of strategies to go about building a passive income stream. But leveraging the power of an income investment portfolio might be one of the best. And despite popular opinion, it doesn’t take that much capital to get the ball rolling. In fact, £5 a day is more than enough. Here’s how.
Starting from scratch
One of the first steps along any investment journey is to build a nice chunk of capital. Saving £5 a day translates to £1,825 a year, or around £152 a month. That means every two months, I’ll have just over £300 to put to work.
In most cases, it’s better to let capital accumulate in an interest-bearing savings account rather than investing small sums every day. Don’t forget buying and selling stocks isn’t free. So by investing infrequently for the long run, less wealth is lost to brokerage fees.
Crunching the numbers
On average, UK stocks tend to generate returns of around 8% a year – half of which comes from dividends. At least, that’s what the FTSE 100 has typically produced. So how much passive income can investors earn when investing £5 a day at this rate?
| Years | Portfolio Value | Passive Income (4%) |
| 5 | £22,337 | £893.48 |
| 10 | £55,616 | £2,224.64 |
| 20 | £179,062 | £7,162.48 |
| 30 | £453,069 | £18,122.76 |
| 40 | £1,061,266 | £42,450.64 |
Compounding takes time to work its magic. But when left to run, investing even small sums can be financially transformative. Forty years is roughly the length of a professional career. So by starting early, even individuals with modest incomes can still potentially reach millionaire status by retirement. And best of all, this comes paired with a £42,450 passive income.
Aiming higher
As previously highlighted, the table above assumes a portfolio will, on average, generate a total return of 8% each year. Sadly, even with a FTSE 100 index fund, that’s not guaranteed. In fact, over the last decade, the UK’s flagship index has struggled to keep up with its historical performance.
But by selecting individual companies to buy, investors open the door to reap market-beating returns when executed sucessfully. That means more money at retirement and a larger passive income.
DS Smith‘s (LSE:SMDS) a prime example of this. Over the last 10 years, the share price has risen a respectable 76%. And when we include the impact of dividends, this return skyrockets to 162%. On an annualised basis, that’s the equivalent of 10.1%. And investing £5 a day at this rate for 40 years would build a nest egg worth just shy of £2m, generating £80,000 in passive income.
The success of this paper packaging company is largely thanks to management evolving DS Smith into a mission-critical enterprise. Online retailers, including Amazon, have become highly dependent on the firm for its ability to meet high-volume orders, something many of its competitors simply don’t have, manufacturing capacity-wise.
The firm’s still sensitive to inflationary input costs, especially energy and paper. With most of its demand coming from e-commerce, it also introduces dependency on consumer spending levels.
Nevertheless, DS Smith has an impressive track record of navigating such environments. Sadly, the business is currently in the middle of a takeover process. So investors will likely have to look elsewhere for market-beating returns.
This post was originally published on Motley Fool
