How I’d build a passive income starting with £5.15 a day

Roland Head explains how he’d target £500 per month in passive income from shares for less than the cost of a daily pint of beer.

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As a self-employed worker, I know my retirement plans are entirely in my hands. I don’t have a workplace pension. That’s why my long-term strategy is to build a passive income fund to help support me as I get older.

I’ve been investing for quite a long time already. But today, I want to explain how I’d start again with just £5.15 per day — less than the average price of a pint of beer in London.

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How I’d start investing

I’ll start with a quick wealth warning. Share prices can fall at a moment’s notice and dividends can be cut. Future results are never guaranteed and it’s generally a bad idea to be a forced seller.

For all of these reasons, I wouldn’t start buying shares until I’d built up a cash savings fund of three to six months’ income.

Once that’s done, I’d start using my investment cash to buy shares in good quality companies with a track record of long-term growth. I’d be looking for businesses with defensive qualities I expect to continue growing steadily for many years.

I wouldn’t try to invest £5.15 every day. Even if it was possible, investing so little would make my trading costs far too high. What I’d probably do is have the total monthly amount (£157) paid into my ISA direct from my bank each month. I’d then aim to buy a new stock every three months or so.

The dividend income I’d receive would be left in my share-dealing account and reinvested with my regular deposits to help drive long-term gains. Naturally, I’d keep my stocks in a tax-efficient Stocks and Shares ISA.

What stocks would I buy?

To start with, I’d want some exposure to consumer businesses with well-known brands. Unilever and drinks giant Diageo would probably both me on my list, thanks to their strong brand portfolios and global footprints.

Other businesses I’d consider might include defence giant BAE Systems, distribution group DCC and FTSE 100 testing and certification specialist Intertek.

All of these stocks have a long history of profitability and regular dividend growth. Although shareholder payouts are never guaranteed, I’d hope to see continued growth over the coming years.

Passive income: what I’d expect

The long-term average return from the UK stock market is around 8%. Using this as a guide, my sums suggest it would take me about 25 years to reach my £500 monthly passive income target.

In reality, it might be quicker or slower than this. There’s no way to know. But one sure way to speed up the process would be to pay in more cash each month.

If I upped my monthly payments to £10.66 (two pints of London beer per day), then I estimate I’d hit my £500 passive income target in just 17.5 years — a big improvement.

Whatever I was able to contribute, I’d want to start straight away. One thing I’ve learned in my years of investing is that good results take time. That’s why I’m making it a top priority to put regular contributions into my Stocks and Shares ISA in 2022.

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Roland Head owns DCC, Intertek, and Unilever. The Motley Fool UK has recommended Diageo, Intertek, and Unilever. 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.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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