Giving up my £5 daily coffee can create lifelong passive income from dividend stocks!

Sacrificing a daily habit that costs a small amount of money and redirecting the savings into dividend stocks could help build a long-term nest egg.

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.

Young Asian man drinking coffee at home and looking at his phone

Image source: Getty Images

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.

The British have long been known as tea drinkers. However, it’s estimated that nearly four in five adults in the UK regularly drink coffee — myself included. But what would happen if I gave up my morning dose of caffeine on the way to work and invested the savings into high-yield dividend stocks instead?

A potentially worthy sacrifice

Like most items, the price of a morning coffee has shot up in recent months. In fact, I can nowadays expect to pay upwards of £6.75 for a large cup of coffee with whipped cream and chocolate sprinkles on top.

Speaking personally, however, I like my hot beverages without bells and whistles. So let’s say I only pay £5 for a large cup each weekday.

If I were to forgo that daily £5 coffee five times a week, I could save just over £100 a month. That’s £1,300 a year that could be channelled into UK dividend shares.

So, instead of paying to drink coffee, I’d essentially be getting paid not to consume it.

Turning coffee into cash with FTSE 100 shares

Now, such a modest sum doesn’t sound like much, but it’s important to recognise that compounding lies at the heart of regular investing.

From 1984 to 2022, the annualised total return of the FTSE 100 was 7.5%. There’s no guarantee that it will produce the same return over the next four decades or so, but I’m going to assume it does for the purpose of this article.

After five years of putting £1,300 into stocks and reinvesting the dividends, my portfolio would have grown to around £7,550. While that isn’t exactly life-changing, it’s not bad for simply redirecting my daily coffee funds into the stock market.

The good news is that after 10 years of investing in FTSE 100 shares, my portfolio would have increased in value to approximately £18,391.

If I now wanted to start enjoying my morning cappuccino again, I could switch to receiving passive income instead. Then, if my income shares were yielding just 5.5%, I would be banking a little over £1,000 a year in dividends.

However, this 5.5% figure is actually quite conservative. Dividend-paying firms such as housebuilder Persimmon, telecoms giant Vodafone and Anglo-Swiss miner Glencore regularly trade with even higher yields.

I should point out that all of these companies have been known to cancel or reduce their dividends in recent years. So it would be important for me to build a diversified portfolio across many sectors.

Why stop there?

If I let compounding do its thing for another decade, my portfolio would reach £56,295 at the 20-year mark. Settling for the same 5.5% average dividend yield at this point would lead to passive income of almost £4,000.

But if I kept going for a further 10 years, the results would be quite amazing. At this point, according to a compound interest calculator, I would have accumulated over £134,419. That sort of money could provide a very nice boost to my pension pot.

Alternatively, that 5.5% dividend yield could unlock an impressive £7,393 in annual passive income. All for giving up a single £5 cup of coffee each weekday!

This example demonstrates the power of making small but consistent investments over time.

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.

Ben McPoland has positions in Glencore Plc. The Motley Fool UK has recommended Vodafone Group Public. 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

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

Should we buy more FTSE 100 shares in December? The stats seem to say yes

The different months of the year should have no effect on where the FTSE 100 goes, should they? The evidence…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

8% yield! Here are the dividend forecasts for Barclays shares for 2024 and 2025

This FTSE 100 bank offers one of the biggest yield on the UK's blue-chip share index. But is it too…

Read more »

Young woman holding up three fingers
Investing Articles

3 reasons why Lloyds’ share price could surge through £1 in 2024!

Optimistic UK investors are buying Lloyds in the hope of a sharp share price rebound. Could the company be a…

Read more »

smiling couple holding champagne glasses and looking at camera at home with christmas tree
Dividend Shares

2 discounted high-dividend stocks on my Christmas list!

These top dividend stocks are already in the Christmas sales! I'm hoping to buy them to make a solid second…

Read more »

Close up of a group of friends enjoying a movie in the cinema
Investing Articles

I’m eyeing these two cheap dividend shares for 2024!

This Fool likes dividend shares as a play for 2024. Here, he identifies two that look cheap and explains why…

Read more »

Investing Articles

This FTSE 250 growth machine is top of my list of stocks to watch in 2024

Despite a 13% fall, Games Workshop shares trade at a P/E ratio of 22. Stephen Wright plans to keep a…

Read more »

Investing Articles

The Tesla share price is a bargain to me

A lot of people think the Tesla share price is overvalued. Oliver Rodzianko disagrees. He tells us why he’s piling…

Read more »

Investing Articles

The BT share price is up 20% in a year. Should I buy now for 2024?

The BT share price has performed strongly so far in 2023. Christopher Ruane thinks it might keep moving up --…

Read more »