I firmly believe investing in stocks and shares is one of the most straightforward ways of building a passive income for life. And I think it is possible to get started with a simple investment of just £10 a week.
Building the pot
Such an amount each week might not seem a tremendous outlay. However, these small contributions can add up over time.
This weekly monthly sum equates to £520 a year. If I invest this figure in a portfolio of dividend stocks yielding between 7% and 8% per annum, I could achieve an annual passive income of nearly £42. Not a amount, but it is a start. Investing is a marathon, not a sprint, after all.
In investing, the real money is made in the long term. Indeed, according to my calculations, if I continue to invest £520 a year for 10 years and reinvest all of my income, I could build a nest egg worth nearly £8k. This could potentially generate an annual passive income of £640.
If I increase my weekly contribution, a much bigger pot would be possible. Of course, I could also lose money if my investments don’t work out as I hoped because I know my capital is always at risk.
My figures show that if I double the monthly contribution, I can build an investment account worth £15k. A pot of this size could generate £1.2k in passive income every year. If I can put away £50 a week, or £2.6k per annum, I could build a £40k nest egg. This could produce £3.2k per annum in passive income.
The longer I can save, the more money I can earn. If I can save £2.6k per year for 20 years and make an 8% return per annum, after two decades, I would have £123k in investments. The potential here is to generate nearly £10k in passive income every year.
Passive income potential
Of course, there is no guarantee I will earn an 8% return on my money every year. I could even earn nothing or lose money. My figures only illustrate the potential returns from this strategy over the next couple of decades. Nevertheless, it is a strategy I am following and intend to keep following for the foreseeable future.
Some of the best dividend stocks on the market at the moment, in my opinion, are Direct Line and Rio Tinto. These companies support prospective dividend yields of around 7% and 13% respectively. That gives an average dividend yield of 10%, above my 8% projection in the example above.
As company dividends are paid out of profits, they are not guaranteed. A sudden decline in profits could force an enterprise to reduce its dividend payout.
Still, I think the level of income on offer from these two companies shows how it is possible to build a passive income stream by using stocks and shares with an investment of just £10 a week. All it requires is a disciplined and consistent investment strategy. And a bit of patience.
Rupert Hargreaves owns Direct Line Insurance. The Motley Fool UK has no position in any of the shares mentioned. 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.
This post was originally published on Motley Fool
