I think 2023 could be one of the best years ever for building passive income from the stock market.
That’s because a lot of FTSE 100 stocks are on high dividend yields, and low valuations. What more do we want?
And with just £250 per month to invest, it could be possible to build up a six-figure sum paying up to £18,000 in annual income. Let me explain how.
Start with an ISA
Investing firm M&G is on a forecast dividend yield of 10%. And analysts expect it to stay strong in the next few years.
If that 10% kept up, £250 per month into M&G in a Stocks and Shares ISA could grow into £50,000 after 10 years. And that could then pay £5,000 per year in passive income.
Keep going for 20 years and it could grow to a huge £180,000. And if that doesn’t show the power of compound returns over the long term, I don’t know what would.
Oh, and 10% of that in income would be £18,000 per year. So what’s the catch?
Risk and diversification
Some yields are high because a stock’s outlook is weak, and the market expects the shares to fall. I don’t think that about M&G, but the risk is there with high-yield stocks.
And it would be madness to put all our eggs in one stock, right? All it might take is a single sector to fall to wipe us out. Don’t forget the great banking crash!
So no, I’d spread my money about to give me some diversification.
Also, stock market returns will vary year to year. As an example, the average Stocks and Shares ISA in 2020-21 gained 13.5%. But in 2019-20, the year before, it lost 13.3%.
More big yields
So, to spread the risk, I see plenty of other great FTSE 100 yields. There’s Legal & General on 9.2%, British American Tobacco at 8.8%, and Taylor Wimpey on 8.5%.
Not far behind, the Glencore yield is at 8.2%, with BT Group on 6.6%.
With just these few shares, we’d have some good diversification. And an average dividend yield of 8.6%.
So £250 per month at an annual return of 8.6%? In 20 years, that could build up to a pot of £153,000 for an annual passive income of £13,200.
Again, I doubt these stocks will pay that much for that long. And there are individual risks we’d need to research. But it gives us some idea of what might be possible.
What about Tesla?
Now, readers might think these are all dull, and what about big growth stocks like Tesla and Nvidia?
I mean, Nvidia has just soared to an all-time high. And it’s up 595% in just five years. We can sell growth shares and buy dividend shares when we want to take the cash, right?
There can be huge risks with stocks like this, and they often have bit of a boom-and-bust habit.
But growth stocks can help build our pot. That’s why I bought some Scottish Mortgage Investment Trust shares.
