The 10% figure gets bandied about a lot when it comes to passive income. Invest your money smartly, get 10% back a year. That’s the essence of it.
People retire aiming for around this amount. Younger investors can use it to grow their money. And even starting with a £10k stake, the idea of getting £1k back a year must sound pretty tempting.
But how feasible is this in reality? And how would an investor go about getting started with this kind of cash? Let’s explore.
Snowballs
The first thing to bear in mind is that finding a reliable 10% cashback from an investment is like finding a snowball in hell. Savings accounts rarely offer that much, and even when they do, inflation is usually running so high that you need it just to keep up in real terms.
Even looking at the stock market, where most of the best past investments have come, you won’t find many stocks promising you 10%. Across the FTSE 350, eight stocks pay 10% or more right now and at least two of those have already announced plans to reduce it.
This is focusing solely on dividends though. Dividends are a company’s primary way of returning cash to shareholders. They allocate a portion of the profits and in good years, shareholders can expect a decent wad of cash.
Puzzles
But dividends are only one part of the puzzle. If we bring share price gains into it then that 10% target becomes much more realistic.
When looking at total returns, the S&P 500 has returned 10.56% in the last 100 years. That clears the 10% mark and then some.
Closer to home, a Vanguard study showed UK shares returned 9.18% between 1901 and 2022. The gap between the UK and the US was much narrower until a few years ago too.
There’ll be a lot of volatility on the way. That £10k won’t turn into £1k each and every year. But on the whole, it’s not a crazy amount to be averaging with the right choice of stocks.
In terms of stocks themselves, one strategy to target those returns or higher is to look for places with a bright future. Take defence, for example.
Defence spending seems to break a new record every few months. The UK defence spend topped £25bn for the first time this year. That’s plenty of cash that will get funnelled to UK defence companies, one of which I like is QinetiQ (LSE: QQ).
Defence
QinetiQ’s a reasonably large company with a market value of £2bn, listed on the FTSE 250, and employs around 8,000 people.
It’s a multinational company too which doesn’t just work for the UK but with governments worldwide. It’s announced numerous contracts with the US military in recent years.
While no one enjoys the thought of more defence spending being needed, it seems we can’t avoid it in today’s world. And it does mean an engineering company like QinetiQ might not be short of business.
The stock isn’t a sure thing. It’s a concern that net income and margins dipped in its latest report. But on the whole, I believe it has a strong chance of returning 10% yearly, or perhaps higher. I may buy the shares soon.
