How I’d invest my first £9,000 today to target £36,400 a year in passive income

This writer reckons one cheap FTSE 100 dividend stock with good growth prospects could be a solid choice for a long-term passive income portfolio.

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Many people will have started 2024 with a New Year’s Resolution to start investing and get passive income flowing into their bank accounts.

However, sometimes life has other plans and things get in the way. But now is as good a time as any.

The new Stocks and Shares ISA year has just started. This means I can plough up to £20k into stocks and enjoy tax-free returns.

Understandably, there’s a cost-of-living crisis and this has hammered many people’s savings. So 20 grand might be a stretch.

Let’s assume I have £9,000 to start investing then. While that sum may not seem like it could grow into anything substantial, history shows it can.

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.

Interest upon interest upon…

Over the last few decades, UK and US stocks taken together have delivered around an 8-10% return year, with dividends reinvested. That’s far higher than I’d get from any cash savings account.

Mind you, it hasn’t been a smooth journey. Investors take fright at almost anything, from the trivial (a small earnings miss by a large company) to the very serious (wars and pandemics).

I say ‘investors’, but actually most of the big trades done today are by algorithms programmed to respond immediately (buy or sell) to the slightest indicator.

The good news is that I don’t need to worry about any of that. I’m playing the long game. And due to the power of compounding, where interest builds upon interest, a single £9,000 investment made today could be worth £77,607 in 25 years (excluding platform fees).

Of course, this is assuming the same 9% historical average rate of return, which isn’t guaranteed. It could be less (or more), and dividends can be cut.

Which shares should I buy?

I would focus on quality and build a portfolio filled with firms that have solid business models, sustainable competitive advantages, fair valuations, and attractive long-term growth prospects.

One FTSE 100 stock I reckon ticks all these boxes is drinks bottler Coca-Cola HBC (LSE:CCH).

The company has the exclusive rights to manufacture and sell Coca-Cola products across three continents. Coca-Cola’s brands include Fanta, Sprite, and Costa Coffee.

So I’d say that’s a solid business model with competitive advantages right there. Moreover, these brands are still growing in developing and emerging markets as consumers earn more disposable income.

In 2023, the firm’s revenue grew 10.7% year on year to €10.2bn, its third straight year of double-digit growth. The dividend has been growing nicely too, and currently has a starting yield of 3%.

Finally, the stock’s trading at what I consider to be a fair value. The forward price-to-earnings (P/E) ratio is 14, which isn’t expensive.

Obviously, an economic downturn could hit sales. That’s a risk here. But there’s a reassuringly diverse mix of brands and countries to hopefully offset this.

Passive income

What if I could afford to contribute a little more towards my £9k? Well, if I could put £500 into different shares like Coca-Cola HBC each month, then I’d really fire up the wealth-building process.

All else equal, my portfolio would now be valued at £606,776 after 25 years! At this point, I could be receiving around £36,400 in passive income, from a dividend portfolio yielding just 6%.

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.

Ben McPoland 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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