I believe investing in UK shares is an excellent way to make a regular passive income.
Drawing up a winning investment strategy can take time to create and perfect. But come retirement, it can deliver terrific wealth as the dividends come flowing in.
In recent decades, the FTSE 100 and FTSE 250 have delivered average annual returns of 7.5% and 11% respectively. This is through a combination of healthy capital gains and dividend income.
Averaged out, the long-term return across these indexes comes out at an impressive 9.25%. This is the kind of return that could eventually provide investors with a very comfortable retirement.
Here’s how I’d invest to try and achieve this.
Reduce the tax burden
The first thing I’d do is open a tax-efficient investment account like an Individual Savings Account (ISA) or a Self-Invested Personal Pension (SIPP).
With a Stocks and Shares ISA, individuals can invest up to £20,000 in a tax year. A SIPP allows someone to invest 100% of their gross annual earnings, up to a limit of £60,000.
SIPPs also provide tax relief of at least 20%, rising for higher- and additional-rate taxpayers. While funds can’t be drawn down until the age of 55, this wouldn’t be an obstacle for someone who doesn’t plan to use it until retirement.
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.
Growth + income
The next thing I’d do is build a balanced portfolio of growth and dividend shares.
The latter can provide a steady stream of income that can then be reinvested in more stocks, growing my pie exponentially. The growth stocks I own — provided everything goes to plan — will experience share price increases that deliver healthy capital gains.
Some top UK shares potentially offer the best of both worlds. Here is one I already own in my portfolio.
Games master
Fantasy wargaming giant Games Workshop Group (LSE:GAW) is a share that’s delivered magnificent returns in recent decades.
Its share price has risen 1,730% since during the past 10 years alone. It has also paid some healthy dividends during that time (incidentally, its forward dividend yield is currently a market-beating 4.3%).
The FTSE 250 firm is best known for the Warhammer line of complex battle games. What’s not complicated, however, is the terrific money-making qualities of these products.
Games Workshop sells its products at huge margins to a large (and growing) global fanbase. It sets the standard in its field, and it is looking to licence its IP to take revenues to the next level.
To this end, it is now in talks with Amazon to bring its Warhammer: 40,000 universe to the big and small screens.
Sales may experience pressure during tough economic periods. But from a long-term perspective the future here is very bright.
Monthly top-ups
To take my returns to the next level, it’s also a good idea to add a monthly contribution to my ISA or SIPP after making my initial investment.
Let’s say that I invest £15,000 in a balanced portfolio of FTSE 100 and FTSE 250 shares. We’ll also assume I spend an additional £300 a month.
Based on that 9.25% average annual return mentioned earlier, I could expect to make a massive £816,713. I could then draw 5% of this down a year for a yearly income of £40,836, which translates to £3,403 a month.
