I firmly believe that owning stocks and shares is one of the easiest ways to generate a passive income for life. The great thing about this strategy is that anyone can follow it. Even with an investment of just £100 a week, I think it could be possible to generate a passive income for life.
As such, here is the approach I would use to invest a sum of £100 a month in the stock market to generate an income.
Building the pot
An investment of £100 a week will not be enough to generate a passive income stream overnight. However, it will form the beginnings of a portfolio that will grow steadily over time.
An investment of £100 a week also means I will be putting away £5,200 a year. At the time of writing, the FTSE 100 supports an average dividend yield of 3.8%. It has returned around 7% per annum, including capital growth over the past three decades.
These numbers imply that if I were to invest this lump sum into the FTSE 100 over the space of a year, I would have a portfolio generating just under £200 a year in passive income. That is a good start.
Assuming I keep this up for a decade and the market continues to return 7% per annum, including dividends and capital growth, my figures suggest that I will be able to build a savings pot of £75,000. With a dividend yield of 3.8%, I think that could provide a passive income of £2,850 a year.
Of course, these are just estimates. Past performance should never be used as a guide to future potential with stocks and shares. However, the numbers provide a good illustration of how I can build a passive income by putting money away every week.
My passive income strategy
I would not depend on the FTSE 100 alone to generate a passive income. I would build a diverse portfolio of high-quality income stocks — companies like British American Tobacco. I already own this corporation in another portfolio for its 8% dividend yield.
Another stock I would buy is the power generation business ContourGlobal. At the time of writing, the stock offers a dividend yield of 6.3%. With its dividend yield of 6.9%, Jupiter Fund Management would also earn a position in my passive income portfolio.
The one downside of investing for a passive income in stocks and shares is that dividend income is never guaranteed. Dividends are paid out of business profits, and if company profits drop, the distribution may be reduced. This is a risk every investor may have to deal with owning income stocks.
Nevertheless, it is a risk I am pretty comfortable with. The equities outlined above offer an average dividend yield of 7%. Using the same numbers as outlined above, a dividend yield of 7% on an investment pot of £75,000 would generate an annual passive income of £5,625, or £469 a month.
This is not a strategy that will be suitable for all investors, but it is one I plan to follow.
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Rupert Hargreaves owns shares of British American Tobacco. The Motley Fool UK has recommended British American Tobacco and Jupiter Fund Management. 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.