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How I’m planning to turn £6.74 of UK shares into a £10,000 passive income for life

Harshil Patel
·3-min read
Young woman smiling putting a coin inside piggy bank as savings for investment
Young woman smiling putting a coin inside piggy bank as savings for investment

UK shares can be phenomenal investments, in my opinion. There are so many choices including world-renowned, long-established companies in addition to start-ups. Good education, consistent rule of law, and favourable business conditions offer UK shares a stable environment to thrive in.

On average, UK shares have historically provided a long-term average return of 7%. To achieve a £10,000 passive annual income, I calculate that I would need a total portfolio of £250,000. This assumes I can withdraw 4% of my total investment pot every year, which is a commonly used estimate.

Assuming I would like to retire in roughly 30 years, I’d like to see how much I need to invest every month to achieve a future total investment pot of £250,000. I calculate that I would need to invest around £205 per month, which is a very modest £6.74 per day. It’s quite amazing that such a small daily investment in UK shares could turn into a £10,000 passive income. This is the beauty of compounding and long-term investing.

So which UK shares to invest in?

If I wanted to automate this investment strategy to achieve this goal for retirement, I would set up regular monthly investments of £205 into a diversified fund or index tracker. This would be a completely hands-off approach needing little further research. I would also set it up in a Stocks and Shares ISA wrapper for its tax savings.

But I also believe that it’s possible to achieve a greater annual return than 7% by learning more about UK shares. Further research of companies and their drivers could lead to annual returns of around 10%-15% on average, in my opinion. Achieving these returns could allow me to start withdrawing a £10,000 passive annual income in 19 years, instead of 30 years.

By researching and carefully selecting individual stocks, I have been able to pick some great winners over the years. Some of the best performers include Games Workshop, Boohoo and Best of the Best.

What to look for when selecting stocks?

When I’m researching UK shares, I like to look for companies that are growing revenues, and more importantly net profits over several years. I also prefer smaller companies as they have greater potential to grow into large firms.

Return on capital is an important metric that highlights quality. I prefer companies with a return on capital greater than 10%. In addition, I like to see double-digit operating margins.

A strong balance sheet is important and I like companies with no debt and a strong cash position. Growth companies that also offer a dividend are positive for me, as it shows that they have excess cash flow needed to issue dividends.

Overall, by actively finding excellent UK shares to invest in, I hope to reduce the time needed to achieve my goal. However, as shown above, even the hands-off approach of investing in an index tracker could turn just £6.74 per day into a £10,000 annual income.

The post How I’m planning to turn £6.74 of UK shares into a £10,000 passive income for life appeared first on The Motley Fool UK.

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Harshil Patel owns shares in Games Workshop, boohoo group and Best of the Best. The Motley Fool UK has recommended boohoo group. 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