“How can I build up any kind of passive income when I have no money saved?” I’ve heard that kind of question a few times.
But everyone I know who invests today started with little or nothing. And some are now raking in bags of cash. The most successful do it with a Stocks and Shares ISA.
But what about someone leaving it a bit late, who wants to build up an income pot as quickly as possible?
They’d have to take a bit more risk, for sure. But what would my approach be?
Cut spending?
I’d take a look at my monthly spending, and cut out everything that wasn’t an absolute necessity. Maybe even Greggs‘ steak bakes.
Running it through my head, I reckon I might come up with £250 a month that way.
And as it’s money I’d have been spending on stuff I didn’t really need, I could afford to take some risk, even the risk of losses.
Big returns?
Could I manage a total annual return of 10% from UK shares? I think I’d be in with a decent chance.
My top choice would be Phoenix Group Holdings (LSE: PHNX), with its fat forecast 10% dividend yield. And if I buy more shares with my dividend cash, it’s really quite amazing what compound returns could do to it.
In just 10 years, I could end up with more than £50k in my ISA. I’d have only put in £30k of my own money, and the other £20k would be from reinvested dividends.
Even more
But here’s where it gets crazy.
If I could keep going for 15 years instead of 10, what do you think would happen?
How does twice as much money, or a bit over £100k sound? That’s right, the extra five years could be worth as much as the first 10. And I could have my £10k per year passive income.
Oh, and of the £100k pot, 55% would have come from dividend cash. That’s more than all the money I’d put in myself.
I doubt many people would want all their cash in one stock. So how else might I generate 10% returns?
Total returns
I think British American Tobacco could do it. There’s a forecast 9.9% yield, and I think the shares are cheap. It’s at the mercy of whatever happens to tobacco consumption in the long term, so I’d need to be comfortable taking that risk.
There’s a handful of FTSE 100 stocks on yields of 8% or more, which would only need a couple of percent in share price rises to hit my target.
I’d definitely look into some of the FTSE 250‘s big yields too. And I haven’t even thought of small-cap growth stocks yet.
Risky
Phoenix Group itself has risks, with new regulations looming over the sector. And insurance can go from shiny one year, to dull just a few years later.
So I guess I might need to chop and change more often than ideal, with the extra costs that entails.
But if I really wanted to aim for that extra, higher-risk, income, I think the odds could be fair.
