£8,000 in savings? Here’s how I’d aim for £1,000 in passive income

Stephen Wright thinks a FTSE 100 stock with a 5% dividend yield could be a key part of a passive income portfolio that can stand the test of time.

| More on:
Shot of an young Indian businesswoman sitting alone in the office at night and using a digital tablet

Image source: Getty Images

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.

Read More

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.

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.

Shares in Burberry (LSE:BRBY) aren’t quite at a 52-week low – but they’re pretty close. Yet I think an £8,000 investment in the UK fashion house’s shares could eventually return £1,000 a year in passive income.

Compounding an initial outlay of £8,000 at 5% for 20 years results in an investment that generates £1,010. And I think that’s the best way to aim for passive income over the long term.

Burberry

The investment case for Burberry shares is reasonably straightforward. The entire business currently has a market-cap of £4.5bn – and that looks cheap when I see the firm’s projections.

In the medium term, the company is aiming for £4bn in revenues and an operating margin of around 20%. So that implies a price-to-operating-earnings ratio of five.

By anyone’s standards, that’s not expensive. And at least 80% of Burberry’s operating income typically becomes free cash flow, implying a 16% return over the medium term.

So the thesis is simple. If the business achieves anything like its medium-term targets, the stock looks like a bargain – and there’s a dividend with a 5% yield in the meantime.

Risk

The big risk for Burberry is that 22% of its sales come from China. I don’t think there’s a big political issue here – in the style of Apple with its iPhones – but I think there’s an economic danger. 

If the Chinese economy stays subdued for an extended period, then it might take a while for Burberry to achieve the targets it has set out. And that might make for a disappointing investment.

Despite this, I don’t see an immediate threat to the company’s dividend. In 2023, it generated almost £1.22 in earnings per share and paid out 61p per share to shareholders.

If that 5% dividend proves to be durable, then I might well make enough to turn £8,000 in cash into £1,000 a year in passive income. And the share price staying down might be a good thing.

Compounding

An important part of the plan is being able to compound my dividends at an average annual return of 5%. If the Burberry share price increases faster than its dividends, I might not be able to do this. 

In that situation, I’d have to look elsewhere to find a 5% dividend yield. That’s probably not impossible, but it would be easier to just reinvest it back into the company. 

I’d therefore be very happy if Burberry just pushed along steadily and kept increasing its dividend gradually. I don’t need the company to be in a hurry to reach its £4bn sales target. 

At today’s prices, £8,000 could buy me 630 shares in Burberry. And I think that would be a fine way to start a passive income portfolio.

One last thing…

Recently, a number of UK companies have found themselves the target of acquisitions. I’m not saying this is likely to happen with Burberry, but I wouldn’t rule it out.

If that happens, I might have to swap a long-term passive income investment for a short-term payout. That’s not part of my investment thesis, but there are worse things that could happen.

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.

Stephen Wright has positions in Apple. The Motley Fool UK has recommended Apple and Burberry Group Plc. 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

Young Black man sat in front of laptop while wearing headphones
Investing Articles

Investing just £10 a day in UK stocks could bag me a passive income stream of £267 a week!

This Fool explains how investing in UK stocks rather than buying a couple of takeaway coffees a day could help…

Read more »

Investing Articles

A cheap stock to consider buying as the FTSE 100 hits all-time highs

Roland Head explains why the FTSE 100 probably isn’t expensive and highlights a cheap dividend share to consider buying today.

Read more »

Investing Articles

If I were retiring tomorrow, I’d snap up these 3 passive income stocks!

Our writer was recently asked which passive income stocks she’d be happy to buy if she were to retire tomorrow.…

Read more »

Investing Articles

As the FTSE 100 hits an all-time high, are the days of cheap shares coming to an end?

The signs suggest that confidence and optimism are finally getting the FTSE 100 back on track, as the index hits…

Read more »

Investing Articles

Which FTSE 100 stocks could benefit after the UK’s premier index reaches all-time highs?

As the FTSE 100 hit all-time highs yesterday, our writer details which stocks could be primed to climb upwards.

Read more »

Investing Articles

Down massively in 2024 so far, is there worse to come for Tesla stock?

Tesla stock has been been stuck in reverse gear. Will the latest earnings announcement see the share price continue to…

Read more »

Young Caucasian woman with pink her studying from her laptop screen
Dividend Shares

These 2 dividend stocks are getting way too cheap

Jon Smith looks at different financial metrics to prove that some dividend stocks are undervalued at the moment and could…

Read more »

Investing Articles

Is the JD Sports share price set to explode?

Christopher Ruane considers why the JD Sports share price has done little over the past five years, even though sales…

Read more »