A tenner doesn’t stretch far nowadays. In fact, it’s unlikely to get me and a mate a pint of Guinness each in London. Yet it could still lay the foundation for a large passive income down the road.
For example, let’s say I squirreled away this amount every day. After one year, I’d obviously have £3,650. After 10 years, it’d be £36,500, assuming no interest is accrued. Not bad.
But what if I invested that money in the stock market? That’s a different story entirely.
Getting started
Investors in the UK can buy shares inside a Stocks and Shares ISA. This marvellous account completely shelters my portfolio returns from any income and capital gains tax.
The annual contribution figure currently stands at £20,000. So the good news here is that my £3,600 a year easily falls within this limit.
The first part of my plan then would be to open an ISA account.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Choosing my strategy
There are a number of strategies that I could employ to try and grow my portfolio. I may decide to invest in growth stocks in a bid to find the next Amazon or Nvidia.
Alternatively, I might want to focus more on established dividend-paying companies.
A third way could be to find firms that pay dividends but have also been growing their sales and earnings strongly.
Such stocks could then have a chance of providing both income and share price growth. The best of both worlds!
Valuable intellectual property
In my opinion, a perfect example of a high-quality hybrid stock like this is Games Workshop (LSE: GAW).
The maker of Warhammer is a global leader in the miniature wargaming market. It has millions of loyal and highly engaged customers who continuously invest in their plastic armies.
Indeed, Hollywood actor Henry Cavill, a lifelong fan, has called the figurines “plastic crack”!
The company’s profit margins — 70.4% gross and 36.9% operating — are excellent. And it has grown its top line at a 16.3% compound annual growth rate over the last few years.
The dividend yield is a respectable 4.2%, but the company is known for distributing surplus cash to shareholders in the form of special dividends.
Returning to Henry Cavill, he is set to star and executive produce a series adaptation and film of Warhammer 40,000 for Amazon. This licensing deal could attract millions more fans to the rich fantasy lore built up by Games Workshop over many decades.
If I wasn’t already a shareholder, I’d invest in the stock today. It isn’t cheap trading at 23 times earnings, and that could present valuation risk if any cracks appear in the growth story. But I think the premium valuation is justified here.
With a market cap of £3.2bn, I see the FTSE 250 firm being promoted to the FTSE 100 one day.
Passive income generation
I think it’s entirely realistic that a portfolio of such stocks could generate an average 10.5% annual return over the long run. That’s not guaranteed, of course, and neither is any dividend.
But such a return would transform £3,650 a year into £660,217 after 30 years. And by then, a portfolio yielding 6% would be paying me nearly £40k in annual passive income through dividends.
Not bad from a simple £10 a day!
