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How I created a passive income with UK shares

Rupert Hargreaves
·3-min read
Three generation happy family walking outdoors in park
Three generation happy family walking outdoors in park

I’ve created a passive income stream with UK shares over the past 10 years. Today, I’m going to explain how I reached this target and take a look at the companies that have helped me get there.

Building a passive income plan

The first step on my journey to building a passive income stream was to set out a plan. I set a goal of being able to achieve a passive income of £500 a month from UK shares. This would be enough, I believed, to cover my housing costs.

According to my figures at the time, to hit this target I’d need to save around £100k. I assumed the market would return approximately 9% a year, based on historical figures. That suggested I need to save £500 a month to build the nest egg within a decade.

As it turned out, equities performed better than expected, and I was able to hit this target much faster. Thanks to the combination of capital growth and dividend expansion, I’ve now hit my passive income target. But I don’t think I would have been able to do this without picking the right UK shares.

The best UK shares

There are a handful of stocks that have helped me meet my passive income savings target over the past decade. The stand-out performers were pharmaceutical group Hikma, consumer goods giant Unilever and insurance group Prudential.

These companies may all operate in different industries, but they’ve several common qualities. I believe it’s these qualities that have helped them achieve impressive capital and dividend growth over the past few years. These qualities have made them the perfect passive income investments.

For example, all three of these organisations own unique products. For Unilever, it’s the company’s billion-pound brands, such as Ben & Jerry’s ice cream. These are recognised the world over. The group is able to charge a premium for these products as a result.

Meanwhile, Hikma manufactures generic and unique drugs. The company’s own drugs are protected by patents, which can last for many years, producing a guaranteed and predictable income stream for the business.

Lastly, Prudential’s competitive advantage is the company’s reputation. It’s well-known in certain parts of Asia and has distribution agreements other trusted financial institutions. These qualities have allowed the business to capitalise on the growth of the region’s middle class during the past few years.

All of the companies above have been able to capitalise on their unique advantages to achieve healthy profit margins and cash generation. This has translated into high total returns for shareholders.

As such, I intend to keep two of these organisations in my passive income portfolio, despite the fact it’s achieved its target. As these firms continue to expand, I’m optimistic their dividends will continue to grow, boosting my passive income stream even more in the years ahead.

The post How I created a passive income with UK shares appeared first on The Motley Fool UK.

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Rupert Hargreaves owns shares in Prudential and Unilever. The Motley Fool UK has recommended Hikma Pharmaceuticals, Prudential, and Unilever. 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.

Motley Fool UK 2020