£20,000 in savings? Here’s how I’d aim for lifelong passive income

Many of us invest for passive income. But how can I turn my savings into a portfolio that can deliver a significant and lifelong dividend stream?

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We’d all love a passive income. Something to make life easier, or something that could allow us to stop working all together. But earning such an income is easier said than done. Even with £20,000 in savings, I’d struggle to make a meaningful ‘wage’. Here’s how I’d invest to turn my savings into a sizeable, and considerable amount of money.

Building a portfolio

While £20,000 might sound like a significant amount of money, it’s not a large enough sum that I could invest and live off immediately. Instead, I need to recognise and leverage three key variables that will help me achieve something special.

The first is time. The longer I invest for, the more my portfolio will grow. That’s because earnings compound over time. Compounding is essentially the process of earning interest on interest. As such, the pace of growth increases over time.

The second is contributions. Yes, it’s great that I may have starting capital like £20,000. But if I can add to that monthly, then my portfolio will naturally grow faster. It’s like providing more fuel for my fire.

And the third element is my rate of growth. For example, if I were to put my money into a savings account, my rate of growth over the long run would probably be something like a measly 2.5% annually.

However, investing offers the opportunity to see our money grow at a much faster rate. Yes, there’s some risk involved, but novice investors can grow their portfolios by high single digits annually. And for experienced investors… well, it can be much, much higher.

The only issue is that if I make poor investment decisions, I could lose money. And losses do compound. As such, I need to make wise investment choices, and use all the resources available to me.

Dividend giant

If I were to follow the above steps, I could turn £20,000 into something much larger in not that many years. The rule of 72 is something that could help me plan here. If, for example, my portfolio grows at 10% per year, I can divide 72 by 10 to get the number of years it will take for your money to double. In this case, 7.2 years.

Once I’ve reached a desirable figure, I can start looking to turn my portfolio into a passive income. And one way to do it is by investing in dividend-paying stocks like Nordic American Tankers (NYSE:NAT). As the name suggests, Nordic American is a tanker company. And it’s one with a huge 12.2% dividend yield.

While a dividend yield this big would normally be a warning sign, Nordic American is currently experiencing some serious tailwinds. The tankers sector is at the start of a supercycle brought about by low tanker orders during the pandemic and resurgent demand.

Exacerbating all this is geopolitics. Russia has been sanctioned, which means hydrocarbons once intended for nearby Europe are now being shipped to Asia. Moreover, the Panama Canal drought and Houthi attacks on vessels transiting the Bab el Mandeb are having a profound impact on the availability of supply.

Of course, there are always risks including the very real challenge of hostile action around the Red Sea. However, the tailwinds are huge right now, and the leasing price for Nordic American’s Suezmax tankers is soaring.       

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.

James Fox has positions in Nordic American Tankers Limited. The Motley Fool UK has no position in any of the shares mentioned. 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.

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