£10K to invest? Here’s how I’d turn that into £4,404 annual passive income

This Fool explains how using a £10K lump sum can turn into a passive income stream worth thousands for her to enjoy in her later years.

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I reckon it’s possible to build a passive income stream for me to enjoy in my golden years.

Let me illustrate how I could achieve a second income of over £4,000 a year, by starting with just £10,000 today, if I had it to spare.

Using a lump sum and stock picking

Let’s face it, no one truly enjoys seeing their tax bill or deductions from a salary. In my plan to create this additional income stream, I can use a Stocks and Shares ISA to legally ensure I don’t need to pay any tax on my investments.

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.

Next, I need to pick shrewd stocks without overdoing it. For me personally, I reckon approximately five to 10 will suffice.

Some key traits for me need to include blue-chip or industry-leading stocks with a healthy balance sheet, good levels of free-cash flows, and future dividend prospects. A track record of dividends would be nice. However, I won’t rely solely on this as the past isn’t a guarantee of the future.

Crunching some numbers, I’d firstly deposit £10K into my ISA. Next, I’d buy shares with the aim of achieving an 8% return. I’d be left with £73,041 after 25 years of compounding.

For me to enjoy this, I would draw down 6% annually. This would leave me with £4,404 annually to enjoy on whatever my heart desires. Bear in mind my mortgage will be paid off, and my children will be supporting themselves (hopefully). Along with other investments, this will be a nice little pot for me.

As a caveat, dividends are never guaranteed. Plus, I might not quite yield 8% as investments come with risks that could hurt payouts. On the other hand, I could end up with a higher rate of return which would be brilliant.

One stock I like

I reckon dividend machine BT Group (LSE: BT.A) could go a long way to help me achieve my aim.

BT shares are down 33% over a 12-month period from 158p at this time last year, to current levels of 105p.

I reckon a big part of BT’s share price drop is due to its continued hefty investment into 5G and fibre roll-out. Although it’s a necessary expense, it is damaging revenue and profit levels at the moment. However, this area is also where I reckon the business could soar to new heights, and provide consistent returns. This can only happen if it can yield the expected results from its investment.

I must mention heightened competition in the telecoms sector is a worry. Furthermore, a load of debt on its balance sheet may hurt payouts. Sometimes, paying down debt could take precedence over rewarding shareholders.

I’m going to indicate my age now, but I remember when BT was the only game in town. I even remember the wired BT branded telephones way back when. What I’m trying to say is that it’s hard to ignore BT’s market position, as well as its vital position in the UK’s telecoms ecosystem.

A dividend yield of 7.5% is very attractive. Plus, the shares look cheap on a price-to-earnings ratio of just 5.

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.

Sumayya Mansoor has no position in any of the shares mentioned. 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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