With inflation already above 10% in the UK. And with predictions that this figure could more than double in the months ahead, creating a passive income stream that puts my money to work doesn’t seem like too bad an idea.
Passive income exists in multiple forms. And despite what some people think, I don’t need a huge amount of capital upfront to create some sizeable returns. Here’s the plan I’m using to build a steady stream to last me for the long term.
Start early
The most important factor for me is the idea of starting early. As a Fool, I believe long-term investing is the most efficient way to put my money to work. And as a 20-something, I have time on my side. The earlier I start, the better chance I’ll have to build a sizeable pot of cash. After all, that’s the aim.
Top up my funds
Despite time being on my side, unfortunately, an abundance of money isn’t. But like I said, I don’t need bundles of cash to put my plan into action today.
What I need to do is decide how much I am willing to give up a month. And with this cash, I want to invest it continuously. By doing this, I’ll benefit from ‘pound cost averaging’, which essentially balances out the price that I buy in at.
Reinvest my dividends
Another step I’d take to maximise my returns is by reinvesting the dividend payouts I receive. From this, I can benefit from compounding. For example, if I own a stock that pays me a 6% dividend, and generates 7% growth per year, that gives me a 13% annual return. Over the course of a few years, this may not seem great. However, an initial £500 investment compounded over 30 years (the length of time I aim to invest for) would return £24,000.
What’s more, should I incorporate the monthly payments (say £30) I’d have been adding, after 30 years this amount would be around £155,000!
Pick high-quality companies
The final factor I’d consider is the quality of the company I chose to invest in.
I want to avoid assets like growth stocks as they often don’t pay dividends to shareholders. Instead, I want to pick dividend stalwarts that have a strong track record of paying out to investors in times gone by. These businesses would hopefully allow me to see growth. And, more importantly, they would keep my passive income stream running.
Some examples of these types of companies include Lloyds and BT.
There’s always a risk
Despite the above, I must always be wary that no dividend is guaranteed. These payments can be cut off by a business at any time if they choose to. I must also be conscious of the fact I may see lower returns than I expected. Both of these could put my plan in jeopardy.
Luckily, investing in multiple companies will help mitigate the risk of this happening. And by following these steps, I’m confident I could build a lifelong passive income stream.
