It’s possible to make a passive income stream with FTSE 100 stocks if you’re willing to be patient. The key is to start buying blue-chip stocks as soon as possible. By reinvesting all of your dividends for long-term growth and sticking to a saving plan, you can make the most of compound interest.
Such an approach could help you turn a small sum, such as £100, into a sizable financial nest egg. That’s the approach I’m using.
Building a passive income
The first step on any passive income journey is to build a savings pot. This will provide money to invest.
The actual amount you’ll need to save will depend on your personal financial circumstances. Retirees may need as much as £2,500 a month to live off without any other income. On the other hand, I’m targeting a passive income stream of £700 a month from FTSE 100 shares. This sum should cover all my housing costs.
My figures show I’ll need £200k to hit this target. But this isn’t a set target, it’s based on my own goals. Every investor will have their own monthly income goals and, as a result, savings target.
Still, based on my figures, it’ll take me 19 years to hit this target. That’s assuming the FTSE 100 grows at an average rate of 7% a year.
FTSE 100 growth
I’m planning to invest my hard-earned funds in a basket of high-quality, blue-chip income stocks every month to produce a passive income. These include global mining giants such as Rio Tinto and BHP, which have a solid track record of returning significant amounts of cash to investors.
I think it’s highly likely these FTSE 100 businesses will continue to prioritise shareholder returns over the medium term. Therefore, they seem to be the perfect passive income shares.
With these blue-chip giants taking care of the income and growth side, all I need to do is make sure I’m hitting my weekly savings target. By putting away £100 a week, that should give me £5,200 a year. Based on the average FTSE 100 dividend yield of 3.7%, this annual contribution has the potential to produce £192 a year in passive income.
By reinvesting all of the income I receive from my diversified basket of FTSE 100 shares, my nest egg should grow rapidly. When dividend income is reinvested, I pick up more stocks, which then produces its own dividend income.
This cycle of compound interest is helping me build a passive income stream with minimal effort. As noted above, all I need to do for this virtuous circle to take effect is to make sure I’m hitting my weekly savings target.
So, all in all, while £100 might not seem enough to build a passive income stream from FTSE 100, I’m confident it is. Over the long term, these little payments will add up, which, when combined with the power of compound interest, should yield substantial returns.
The post How I’m making a passive income with £100 a week and the FTSE 100 appeared first on The Motley Fool UK.
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Rupert Hargreaves has no position in any of the shares mentioned. 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.
Motley Fool UK 2020