The UK is home to some of the most generous dividend shares in the world. With mature enterprises dominating the British stock market, indices like the FTSE 100 have a reputation for stability. That’s precisely why when the S&P 500 fell by roughly 20% last year, the UK’s flagship index was actually up by 1%.
But stability doesn’t mean there aren’t lucrative investments to be made. In fact, given sufficient time, a relatively modest investment of £200 each month can translate into a substantial nest egg. And it could even pave the way for a new income stream of £51,426 each year. Here’s how.
Building wealth with UK shares
Putting aside £200 each month can lead to substantial savings alone over time. In fact, after 30 years, with no interest added, this amounts to £72,000. But by making prudent investments, this capital can be grown to far more bombastic levels.
Building capital is usually the priority in the early days of an investment journey. Focusing on growthier UK shares will likely be the better move in these situations. While this does lead to more volatility, it also paves the way to a potentially larger passive income stream in the long run.
Fortunately for investors, the FTSE 250 contains an entire roster of these types of investments. Since its inception, this growth index has delivered slightly superior returns than the FTSE 100, with an average annualised gain of around 10.6% as of the end of 2022.
Assuming these average returns continue in the future, investing £200 each month in UK shares at this rate would lead to a portfolio worth £514,264 in three decades.
| Year(s) | Savings | Portfolio |
| 1 | £2,400 | £2,520 |
| 5 | £12,000 | £15,736 |
| 10 | £24,000 | £42,407 |
| 15 | £36,000 | £87,614 |
| 20 | £48,000 | £164,240 |
| 30 | £72,000 | £514,264 |
Turning a nest egg into an income stream
With a half-million-pound portfolio in the bank, investors have several options available. For those looking for more security, it may be prudent to phase themselves out of growth stocks and into UK dividend shares. This could be as simple as migrating into a low-cost FTSE 100 fund. After all, the index has typically offered a dividend of around 3% to 4%.
Alternatively, someone happy to take on risk might want to continue their existing investment strategy and withdraw any new gains. This could be the difference between earning around £20,570 or £51,426 each year.
Bigger is not always better
At face value, opting for a £50k passive income sounds like the better deal. But there is a giant caveat to consider. The FTSE 250 is far more volatile than the FTSE 100.
Moreover, these historical return rates aren’t guaranteed to continue, meaning investors could end up with considerably less than expected. This is especially true when another stock market crash or correction eventually rears its ugly head.
During these periods of volatility, portfolios jam-packed with growth stocks usually are the ones that get hit the hardest. While owning mature dividend stocks won’t offer complete protection, the downside risk is usually lower.
At the end of the day, investors need to stick with a strategy that matches their personal objectives and risk tolerances. But regardless of the choice between growth or dividend, UK shares nonetheless provide a path to building substantial long-term wealth.
