The average UK adult has about £11,000 in savings. Well, that was in January, according to Finance Monthly. I reckon that could make a great start to building long-term passive income.
I won’t speculate on rare metals, buy peanut futures, or pick any of the weird and wonderful ideas out there.
No, there’s only one way for me. I put my money into quality UK shares. And I reinvest all dividend income, to give me an extra boost.
10% annual returns?
Imagine a share that returns 10% per year on average, with 5% in share price gains and 5% in dividends.
If I invest £11,000 in it, I could draw £550 per year in dividends right away. And what’s left could almost treble in 20 years to £29,000.
But if I buy new shares with the income, my pot could grow as big as £74,000. And then 5% in dividends from that could provide me with £3,700 in passive income per year.
And someone with a 30-year horizon could build up £192,000, and then pocket £9,600 a year in dividend income.
Stocks and Shares ISA returns
Am I a bit optimistic here with 10% total returns? Maybe. But in the past 10 years, the average Stocks and Shares ISA has returned 9.64% per year. And a handful of FTSE 100 stocks are forecast to pay more than 8% in dividends alone.
Let’s pick one example, Legal & General (LSE: LGEN). Forecasts put the dividend yield at 8.2%. And they also show a forward price-to-earnings (P/E) ratio of 11, dropping to under nine by 2026.
Insurance stock valuations can be up and down, but at least I don’t think that valuation makes the shares look overpriced.
Dividend returns
On dividends alone, £11,000 in Legal & General shares today could grow to £53,000 in 20 years, or £117,000 in 30 years. And doesn’t that show the benefits of being able to keep our money invested for as long as we can? Even a few more years can make a big difference.
This assumes the dividend and the share price don’t change, which is not likely. But even with that, we could again end up with £9,600 a year in passive income.
This is just one stock, and it’s been volatile in the past. And in today’s economy, I’d say any company like this in the financial sector could be riskier than usual right now.
So, diversification is a must in my book. But it needn’t mean compromising my aims.
Superior FTSE 250 returns
If we look at smaller stocks in the FTSE 250, we still see lots of quality companies. And the index is home to some great investment trusts too, which can boost diversification further.
In fact, the FTSE 250 as a whole has been averaging 11% per year.
So, I reckon a mix of top-quality FTSE 100 and FTSE 250 stocks is the way I’d go with £11,000 in savings. And I’d keep saving too.
