Generating a £18,000 passive income by buying UK shares may sound like a crazy idea. Even more so, given that some stock prices have been in freefall since the start of 2022, as fears of a recession continue to mount.
But by diversifying across a wide range of industries in high-quality companies, it’s possible to generate substantial returns, even with only £300 per month.
Buying UK shares for the long term
With supply chain disruptions, inflation, and rising interest rates all landing simultaneously, the sentiment surrounding the stock market is understandably fearful. And it’s somewhat justified. After all, with supply chains in jeopardy, sourcing the necessary raw materials to meet customer orders becomes challenging for businesses. And the slowdown in consumer spending, courtesy of spiking energy bills, doesn’t exactly help the situation either.
However, this may ultimately be irrelevant for long-term investors of high-quality UK shares seeking a passive income. Why? Because these disruptions are only temporary. And when working with a time horizon that spans decades, an economic slowdown for a year is nothing more than a blip on the radar.
I’m not denying that companies won’t feel the pressure. But surviving the storm will obviously be easier for those with strong balance sheets flooded with cash, even if cash flows have been impacted by the ongoing situation. And some may even use the turmoil to their advantage. After all, when prices are low, it creates the possibility for cheap acquisitions. Alternatively, they can leverage their competitive advantages to steal market share from rivals that aren’t in a strong position.
Finding the UK shares with solid financials and competitive supremacy is obviously easier said than done. But by spending some time and dedication, spotting such opportunities could lead to lucrative long-term passive income.
Building a passive income portfolio
Beyond buying top-tier UK shares while prices are low, it’s important to diversify across different sectors. Why? Because it’s an easy way to eliminate a substantial portion of the risk. Take the 2020 stock market crash as an example. A portfolio with stocks in a variety of industries fared far better than one concentrated in a single sector like travel or hospitality.
Even if an investor simply matches the historical 8% annual performance of the FTSE 100, a monthly investment of £300 can create a fairly impressive retirement fund. After 30 years, such a portfolio would be worth just under £450,000-£340,000. Much of that would be profits gained from investments.
Following the retirement rule of thumb of withdrawing 4% from the pension pot, each year would generate £18,000 in passive income. Not bad at all, in my opinion. And by using tax-efficient investment accounts like a Stocks and Shares ISA, this income would be tax-free!
But I have to recognise that nothing’s guaranteed, of course. I could make a much lower passive income or even lose money. That’s always a risk, but it’s one I’m inclined to take given the potential reward.
