How to make passive income in 2023 with only £50 a week

Deploying this passive income strategy could help investors to establish a sizeable income stream, even if they have only small amounts of capital.

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.

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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.

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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.

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Building a passive income stream is arguably one of the most common financial goals. And by properly leveraging the power of the stock market, investing in UK shares can achieve substantial results, even with only £50 a week.

By focusing on high-quality enterprises with reliable dividends, a small investment can grow into a sizable nest egg over the long term. Here’s how.

Building wealth with British stocks

At the heart of this strategy lies dividend income from top-notch businesses. Looking at the FTSE 100, the average dividend yield in the United Kingdom is roughly 4.1%. If I’m targeting a £1,000 monthly passive income, or £12,000 a year, I’d need an investment portfolio worth around £292,000.

Needless to say, that’s a lot more than £50. And even if I were to invest this capital into an FTSE 100 exchange-traded fund (ETF), reaching this milestone would take around 114 years! Assuming, of course, the index continues to deliver its historical annual return of 7.6%.

But what if I’m able to spare £50 a week? That’s roughly the equivalent of £217 a month. Which, if invested the same way, would reduce the waiting time to just 30 years. That’s still a long while, but it’s far more realistic. And it highlights the importance of starting as soon as possible.

Investors could further accelerate this process by targeting individual stocks rather than simply tracking an index. This obviously comes with added risk. But a carefully crafted passive income portfolio could easily achieve a 5% annualised dividend. And with a higher yield, the threshold to hit my £1,000 monthly target is lowered.

Investing has its caveats

Simply investing in stocks that offer a fat yield isn’t likely to result in success. In most cases, unusually large payouts are often an indicator of unsustainability. Don’t forget dividend payments are entirely optional for businesses. They’re designed to return excess capital back to shareholders but can be quickly cut, cancelled, or suspended if that pool of money runs dry.

This is why investing in strong enterprises with bolstered cash flows and plenty of reserve resources is critical. That way, should short-term disruptions come along, the income generated by my investment portfolio is less likely to become compromised.

Another factor to consider is the timeline. This process may take 30 years on paper, but it could be substantially longer in practice. Why? Because the stock market has a tendency to throw a tantrum every once in a while. 2022 was a perfect reminder of this.

Stock market corrections and crashes are an unavoidable reality of investing. And while they can create substantial wealth-building opportunities, they can also slow down, or potentially derail investment strategies.

Nevertheless, given the potential long-term rewards of financial independence, these risks are worth taking, in my opinion.

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.

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.

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