How I’d invest £10k to create a passive income for life

Rupert Hargreaves explains the strategy he would use to generate a passive income for life with just £10,000 right now.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

pensive bearded business man sitting on chair looking out of the window

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I firmly believe that investing in stocks and shares is one of the easiest ways to generate a passive income for life. I also think it is possible to start building a passive income stream with an investment of just £10,000.

With that in mind, here is the strategy I would use to invest a lump sum in equities today with the goal of generating income for life.

Generating a passive income

Buying equities for dividend income is a very straightforward way to generate a passive income stream. However, the strategy does come with some downsides.

Dividend income is paid out of profits. Therefore, if a company’s profitability suddenly declines, it may not be able to pay out as much income to shareholders as in previous years. Therefore, investors need to be prepared for a sudden dividend cut if an operating environment changes significantly.

I will be keeping an eye on this when it comes to all of the companies outlined below. These corporations might look like attractive dividend investments, but their prospects could change suddenly if the operating environment deteriorates.

Even after taking these risks into account, I am still convinced that equities are one of the best passive income assets to own.

Rather than focusing on the highest yielding stocks on the market, I would buy a mix of higher and lower yielding equities from my portfolio.

I think this could open the door to more capital growth as companies that are not paying out all of their profits to investors tend to invest more in their respective businesses.

This can lead to faster earnings growth rates in the long run.

Growth stocks 

This is why I would acquire pharmaceutical companies AstraZeneca and Hikma for my portfolio today. The latter yields just under 2%, while the former yields around 2.5%.

These are not the highest yields on the market. Still, both organisations are also investing significantly in developing their drugs pipelines. I think this should help underpin earnings growth and potentially dividend growth in the years ahead.

Both companies may have to overcome challenges, including competitive forces and regulatory factors, which could weigh on growth.

At the other end of the dividend spectrum, I would also look to acquire Direct Line and home builder Persimmon for my passive income portfolio. The former supports a dividend yield of around 8%, while the latter yields around 9%.

Cash returns 

These companies have a fantastic track record of returning lots of cash to investors. Their near double-digit dividend yields stand testament to these qualities. They also have strong balance sheets, which are stuffed full of cash. This should help support their dividend policies in the years ahead.

Still, their dividend credentials are far from guaranteed. A sudden drop in profitability could hit either outfit at a moment’s notice. In this scenario, they would have to reconsider their payouts.

That is why I would combine both lower-yielding and higher-yielding stocks in my passive income portfolio.

Buying the four companies outlined above would yield around 4% on my £10,000 lump sum. That could generate a passive income of about £400 a year for life.

I could then build this income stream by steadily depositing more into my investment account and acquiring a higher number of shares in the firm’s outlined above.

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 assessed. Consider taking independent financial advice.

Rupert Hargreaves owns Direct Line Insurance. The Motley Fool UK has recommended Hikma Pharmaceuticals. 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »