£9,000 in savings? Here’s what I’d do to turn that into a £1,220 monthly passive income

With the right strategy, it’s possible to create a substantial passive income with a portfolio of FTSE 100 and FTSE 250 shares. This is how I’d try to do it.

| More on:
Smiling young man sitting in cafe and checking messages, with his laptop in front of him.

Image source: Getty Images

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.

Read More

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.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

There are multiple ways that investors can try to make an excellent passive income. Buying property and putting money into savings accounts are two traditionally popular methods. Peer-to-peer lending is also growing rapidly among those seeking a second income.

I think building a portfolio of UK shares is the best way to create a supplementary income stream, however. This method doesn’t require huge upfront costs like property investment. I am also likely to make a better return than I would from a simple savings account.

History is not always a reliable guide of what to expect. But with the right strategy, I could make an average annual return of up to 9.3% by buying British stocks.

This in turn could provide me with a healthy passive income for retirement. If things go to plan, a £9,000 lump sum investment in UK stocks today could eventually provide a £1,220 monthly passive income.

Here’s how I’d aim to achieve this.

Minimise costs

My initial step would be to open a tax-efficient financial product to hold my shares. In the UK, we are talking about either an Individual Savings Account (ISA) or a Self-Invested Personal Pension (SIPP).

The £20,000 annual allowance on an ISA is enough for most people. For those that can afford to invest more, the SIPP has an allowance of £60,000, although this is dependent upon what a person earns.

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.

I’d also carefully consider the management and trading charges I could expect to pay, which can differ greatly among providers. Some companies offer lower service costs and higher dealing fees, while others operate the other way around.

Reducing tax and minimising trading costs can, over time, have a significant impact on an investor’s eventual returns.

A 9.3% return

With my account up and running, I’d aim to create a portfolio dominated by FTSE 100 and FTSE 250 shares.

This is because the average annual return spread across these indexes is an impressive 9.3%. If this trend were to continue, a £9,000 lump sum investment right now would — after 40 years — transform into £366,092.

That’s equivalent to a £1,220 monthly income, assuming I drew down 4% of this amount each year.

A 4% drawdown would likely give me a 30-year sustainable income before the well ran dry.

A top value share

So what sort of stocks would I buy? Targeting value shares could be a good idea to build long-term wealth.

This is because shares that trade cheaply have the potential for significant price gains as their true value is recognised. They could therefore boost my chances of hitting that 9.3% average return, or even exceed it.

Vodafone Group (LSE:VOD) is a FTSE 100 value share I think could deliver spectacular returns. It trades on a forward price-to-earnings (P/E) ratio of 9.2 times.

It also has a price-to-book (P/B) ratio of 0.4. A figure below one indicates that Vodafone trades at a discount to the value of its assets.

While it faces strong competition, I believe Vodafone shares could still deliver phenomenal returns as increasing digitalisation drives telecoms demand. Its extensive African operations may also help it achieve excellent profits as wealth levels there rapidly rise.

I believe a portfolio filled with value stocks like this may eventually deliver a healthy passive income.

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Vodafone Group Public. 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.

More on Investing Articles

Investing Articles

Up 14% in 2024, what’s next for the Lloyds share price?

This Fool takes a closer look at what prompted the Lloyds share price to rise this year, and offers her…

Read more »

Investing Articles

5 FTSE 100 stocks to consider for a lifetime of passive income

I see lots of cheap dividend stocks in the FTSE 100 right now, but prices are starting to rise. Here's…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

3 growth stocks I’m desperate to buy as the FTSE 100 dips

Never waste a dip, says Harvey Jones. Three of his favourite growth stocks have fallen over the last month and…

Read more »

Investing Articles

I’d use a £10K ISA to try and generate £900 in dividends annually like this!

Christopher Ruane explains how he would invest a Stocks and Shares ISA in blue-chip companies to try and set up…

Read more »

Investing Articles

Here’s how I’d build a second income stream worth £1,228 a month by investing £10 a day!

A second income stream could come in handy later in life. This Fool explains how she’d build one by investing…

Read more »

Investing Articles

5 FTSE 250 stocks I’d buy for a lifetime of passive income

Here's why I think the FTSE 250 could be the best UK stock market index to go for in 2024…

Read more »

Union Jack flag triangular bunting hanging in a street
Investing Articles

Buy cheap FTSE shares, says HSBC

Analysts at HSBC have upgraded their rating of FTSE stocks and reckon the blue-chip UK index could carry on powering…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

It could be worth buying the dip for this FTSE 250 stock, down 7% today

Jon Smith spots a sharp drop in a FTSE 250 stock but explains why this could just be a blip…

Read more »