Many investors dream of being able to live off a passive income stream from their stocks and shares.
It is not as hard to hit this target as it might first seem. I believe all you need to achieve this goal is a set savings and investment plan, as well as a little bit of patience.
Indeed, by following these rules, I reckon it’s possible to build a passive income stream with an investment of just £5 a day.
Passive income stream
The first stage on any passive income journey is to build a large savings pot. The best way to do this is to invest in the stock market.
Over the past 35 years, UK blue-chip stocks have produced an average annual return for investors of around 8%. Equities have yielded this long term average return even though the market has dropped approximately 50% on two occasions. As such, I think it’s highly likely this trend will continue in future.
That’s why I believe it is possible to turn an investment of just £5 a day into a financial nest egg large enough to produce a passive income.
An investment of £5 a day, is worth roughly £152 a month or £1,825 a year. According to my calculations, this level of investment could achieve a final investment value of £534,000 over four decades.
Doubling the investment to £10 a day or £304 a month, could see an investor achieve a nest egg worth £500k in 30 years.
Investing for income
After building a large savings pot, the next stage is to invest for income.
There are plenty of options to choose from. The FTSE 100 currently supports an average dividend yield of around 4.4%. However, some companies in the index yield as much as 9%.
I think the best approach could be to build a diversified basket of blue-chip income stocks. Based on the current yields available from stocks such as Phoenix Group, GlaxoSmithKline and mining giant BHP, I reckon it’s possible to achieve an average dividend yield of around 6%.
On a lump sum of half a million pounds, this implies a potential passive income of £30k a year. If held in a Stocks and Shares ISA, this income would be tax-free.
Plenty of options
Investors have plenty of options to generate a passive income stream. Saving £10 a day for 15 years could yield a savings pot of £100k. By investing this money in the high-yield blue-chip income stocks highlighted above, investors may be able to achieve a passive income of £6k a year.
So, that’s how I’m planning to turn an investment of this £5 a day into a passive income stream. Any investor can follow a similar path, all it takes is a little research and patience. Considering the potential rewards from following a long-term strategy, such as that profiled above, the extra effort is almost certainly worth it in my opinion.
The post How I’m planning to turn just £5 a day into a passive income appeared first on The Motley Fool UK.
Rupert Hargreaves owns no share mention. The Motley Fool UK has recommended GlaxoSmithKline. 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