I think UK stocks are a great option for passive income because they pay higher average dividends than their US counterparts.
The average dividend yield on the FTSE 100 is 3.5%. In fact, several well-established UK companies offer yields as high as 10%. On the US’s most popular index, the S&P 500, it’s only 1.32%.
By investing via a Stocks and Shares ISA, UK residents can minimise their tax obligations. This type of ISA allows investments of up to £20,000 per year with no capital gains tax charged on the returns.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
That’s just the start, though
The secret to successful investing isn’t always about making big bets or timing the market perfectly. Sometimes, the most powerful strategy is simply to start small and stay consistent.
Even with just £100 a month, I can harness the incredible power of compound interest by investing in dividend-paying stocks and reinvesting the dividends. Over time, these small contributions can grow into a substantial nest egg.
Balancing risk and reward
I’ve been building up my passive income portfolio for some time now. It includes some high-yield dividend shares, growth stocks, and defensive assets to keep things steady during market volatility.
The trade-off means my average yield isn’t as high as it could be but my risk score is significantly decreased. Since my long-term strategy spans several decades, I need to be prepared for anything.
Calculating returns
Consider a portfolio of 12 stocks, eight of which have yields between 6% and 10%. Even if the rest are low or zero, it would return an average yield of around 6%.
Since it’s income-focused, the price growth would be lower than average, probably around 5% per year.
By putting in £100 a month, that portfolio could grow to £23,000 in 11 years. At that point, the annual dividend payout would be about £1,200 — the same as my annual contributions. I could then stop contributing and leave it to grow by itself.
After another 10 years, the compounding returns would have ballooned the pot to approximately £66,000, paying annual dividends of around £3,650. Another decade later and I’d be ready to retire, with a pot of around £200,000, paying annual dividends of £12,000.
That would be a decent addition to my pension, considering I only had to contribute £100 a month for the first 10 years. Keep in mind, 30 years is a long time. Many factors could change, so the final amount could be far less… or possibly more.
A stock to consider
One of the first stocks I added to my portfolio was HSBC (LSE: HSBA). As the largest bank in the UK, I feel it’s a fairly safe investment. Not to mention, it boasts a very attractive dividend yield of 7.1%.
Banks are not particularly defensive though and HSBC is prone to volatility. The price was hit hard during the 2008 crisis and again during Covid. This is also reflected in its dividend payments, which were reduced in 2008 and 2009, and again in 2019 and 2020.
But during strong economic periods, payments have been reliable, often increasing year on year. Since 2020, the annual dividend has quadrupled from 15c to 61c per share. No surprise why I think it makes a good addition to my portfolio!
This post was originally published on Motley Fool
