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How I’d invest £5k to generate a passive income from UK shares

Rupert Hargreaves
·3-min read
Silver and golden colorful Christmas glitters showing the year 2021 on turquoise background.
Silver and golden colorful Christmas glitters showing the year 2021 on turquoise background.

I think acquiring UK shares could be a straightforward way to generate a passive income stream. And I reckon it’s possible to do this with an initial investment of just £5,000.

Passive income with UK shares

One of the easiest ways to generate a passive income could be to buy an FTSE 100 tracker fund. At the time of writing, this blue-chip index offers a dividend yield of around 4%. That’s equivalent to an annual income stream of £200 on an investment of £5,000.

I think this could be a perfectly acceptable approach to building a passive income stream. However, instead of owning the whole FTSE 100, I would rather hold a basket of blue-chip UK shares with high dividend yields.

While the index supports an average dividend yield of around 4%, some stocks offer yields of more than 7%. Companies such as Standard Life Aberdeen, Legal and General and Imperial Brands. These stocks yield between 6.7% and 8.9%.

I would build a portfolio of these companies. A diversified selection of between five and 10 high-yield stocks would, in my opinion, be enough to provide a healthy passive income stream. There’s also the potential for capital growth in the long run as these operations work on expanding their underlying profitability.

Investing for the future

I reckon it’s possible to build a portfolio of UK shares with an average dividend yield of 7%. This would provide a passive income of £350 a year on an investment of £5,000.

If one wants to achieve a higher level of income, adding additional funds along the road is an easy way to do so.

And one does not even have to use that much extra capital to increase the passive income. For example, according to my calculations, on an initial lump sum investment of £5,000, an additional investment of just £250 every month could lead to a final pot of £54,000 after 10 years, assuming the reinvestment of income during this time frame. This final sum could generate an annual passive income of nearly £4k.

Using this simple structure, I plan to build a passive income stream with UK shares. I estimate I’ll need a portfolio of around £100k to produce an annual income of £7,000. That should be enough to cover all my yearly living costs.

Based on a 7% annual rate of return, I estimate I’ll need to put away an extra £500 a month on top of the £5k starting pot. I should be able to reach my goal within a decade using this method, assuming I reinvest all of my income along the way.

The bottom line

That’s the approach I plan to use to produce a passive income stream from UK shares. With a disciplined investment strategy and long-term savings outlook, I believe it should be straightforward to hit this goal within 10 years.

The post How I’d invest £5k to generate a passive income from UK shares appeared first on The Motley Fool UK.

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Rupert Hargreaves owns Imperial Brands. The Motley Fool UK has recommended Imperial Brands. 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 2021