Let’s say I’m looking for a chunky passive income to supplement my retirement pension. But with a starting pot of £10,000 in savings, I wouldn’t get £500 a month in passive income right from the start. I mean, that’s £6,000 per year, or an annual return of 60%.
Now, I reckon UK stocks and shares can provide years of great returns, but not that good.
Still, £10,000 is a pretty nice start. And by adding to it over the years, I think I’d have a very good chance of reaching my goal.
Perhaps the easiest way to take home some passive income from the stock market is to buy dividend shares.
Sharing out the cash
Many companies divide up their earnings each year, and hand over a portion to each of their shareholders. And we just sit back and watch the cash roll in.
That’s just what I plan to do when I retire. But while we’re building up our nest egg, I don’t think it matters which kind of shares we buy.
Growth stocks in the hope of share price rises, or dividend stocks and buy new shares with the cash? I don’t care, just as long as we can find good value investments.
First buys
Starting with £10,000 today, I’d want to try to keep my risks down. Valuations rise and fall, we have to accept that. But early losses could give our confidence a real kicking.
So here’s how I’d start.
I’d spread my money into 10 portions, and buy 10 different stocks with it. And my first two should get me a world of diversification — City of London Investment Trust and Scottish Mortgage Investment Trust.
Spread the risk
They’d spread the risk in a few ways.
First, City of London goes for top UK shares, like Shell, Tesco, and Unilever. And it aims to raise its dividend every year.
Scottish Mortgage, which we’d never guess from the name, buys global growth stocks, mostly US ones. Names like ASML, Nvidia, Tesla.
Diversified
Bingo, that’s money spread across dozens of stocks in a stroke, covering dividends and growth, with domestic and international exposure too.
It’s already looking like a serious portfolio, and I’ve only put up £2,000 so far. Who says this investing lark is hard?
I might next check for the FTSE 100 sectors that have the best earnings and dividend forecasts.
Right now, it looks like finance stocks. Analysts predict a £30.8bn rise in pre-tax profit from the sector for the current year, way more than the gains from any other sector.
How long?
What would it take to hit my target of £500 per month? It all depends on how much extra I can add, what I might earn, and how long I keep going.
Of course, there’s a chance my investments might underperform. But if I can get close to the long-term UK stock market average of around 7% per year, and add an extra £100 to my pot each month, I could get there in 20 years.
Or if I could match the average Stocks and Shares ISA returns of the past decade, of 9.6%, it might take only 13 years. Invest more each month, and I could do it even quicker.
