£8,000 in savings? I’d use it as a start to aim for £30k a year in passive income

Here’s how regular investing in the UK stock market, over the long term, could help us build up some nice fat passive income every year.

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When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

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The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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I have a friend who wants to invest to set up a bit of passive income. Not for himself, but for the future of his kids.

I think that’s a great outlook. And it helps give him the long-term focus that many people these days seem to lack.

People ask me for get-rich-quick stock tips, and I always have to disappoint them.

When I tell them I can’t do better than throwing darts at the Financial Times, that ruins my ‘investment expert’ status in their minds. But it keeps them off my back.

Long term

But when someone is talking about long-term investing for passive income, then I’ll offer all the help I can.

Sometimes they’re disappointed when I can’t tell them which stocks to buy. But, we have to make our own investment choices. And all I can do is explain some facts, and offer some thoughts on strategies, to try to help them make their own decisions.

My friend has about £8,000 saved, and can add to it. So, the first thing I’d point out to him is that the UK stock market has wiped the floor with other forms of investment for more than a century.

I’d also make it clear, though, that there’s no gurantee that future returns will be the same as past returns.

120 years

But, saying that, over the past 120 years, UK stocks have made average annualised returns of about 4.9% above inflation.

As it happens, City of London Investment Trust (LSE: CTY) is on a 4.9% dividend yield. Oh, and it’s raised its dividend for 57 years in a row.

So what if we put £8,000 into that, and the share price rises by the Bank of England’s long-term inflation target of 2%. That should match stock market history quite nicely.

Left there for 30 years, with dividends used to buy more shares, it could grow to nearly £60,000. Compounding really can help build up our returns over the years.

And, it’s without a single extra penny added.

Add more cash

What about another £5,000 each year at the same returns? In 30 years, we could end up with half a million pounds! And that could get us 30 grand a year in passive income.

And what a time to start, with a brand new Stocks and Shares ISA allowance of £20,000.

This all leaves us with the tricky question of what shares to buy. And that has to be down to individual choice. We need to choose a strategy that we understand and are comfortable with.

Diversification

I rate diversification as essential, and I get a good bit of that from an investment trust like City of London. It holds BAE Systems, Shell, HSBC Holdings, and a lot more top FTSE 100 stocks.

It still has risk, and if it fails to up its dividend one year then the share price could suffer. The trust invests for a mix of income and growth, and some of its stocks don’t pay much at all. And, in a tough year, the balance could be critical.

So I’d definitely diversify futher. And then hold for the long term.

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.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Alan Oscroft has positions in City Of London Investment Trust Plc. The Motley Fool UK has recommended BAE Systems and HSBC Holdings. 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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