I’m confident it’s possible to build a passive income stream by investing in quality stocks.
Let me explain how I would go about this if I had the cash to spare.
Ground rules
First things first, I need an investment vehicle. My preferred method would be a Stocks and Shares ISA. With this, I have a £20K yearly allowance. Plus, the draw of this choice is I don’t have to surrender a penny of tax on dividends received.
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.
Next, I’ve decided I’d invest £250 per month, for 25 years. By carefully selecting the best dividend–paying stocks, I’ll be using my money to buy shares with the chance of maximizing my pot.
I’d aim to buy approximately 10 stocks and diversify my holdings, which I reckon will boost my chances of achieving my goal.
Next, if I aim for a rate of return of 7%, after 25 years, I’d be left with a total of £203,949. The next thing I need to do is draw down 5% for me to enjoy. Drawing down 5% would leave me with £10,197 annually.
This is a tidy sum I can enjoy during my retirement on whatever my heart desires. It’s worth mentioning I’ll have other investments and pensions to boost my income at this stage too. Plus, I’ll have paid off my mortgage by this time so that’s one major expense I won’t have to worry about.
As a caveat, I do understand that dividends are never guaranteed. Plus, I might be aiming for 7% but my stocks could return less. Conversely, they may even pay out more, and I could be left with a larger pot than I aimed for.
Banking behemoth
An example of the type of stock to help me achieve the above plan is HSBC (LSE: HSBA).
Despite economic issues in the past year or so hurting banking stocks, HSBC shares are moving upwards. The shares are up 17% over a 12-month period from 586p at this time last year, to current levels of 687p.
I reckon the potential for the China-focused bank is untold, especially from a growth perspective. As the region’s wealth level is growing rapidly, HSBC has the existing presence and brand power, to capitalise. Increased performance could boost investor returns.
At present, a dividend yield of over 7% is attractive. Plus, the shares look great value for money to me right now on a price-to-earnings ratio of just eight.
The biggest risk that could derail HSBC’s performance and returns is twofold. Firstly, continued economic issues across the globe could hurt growth ambitions. A prime example of this is the economic slowdown in China in recent months.
Next, potential future geopolitical tensions between superpowers China and the US could also hurt growth in the region. In turn, this could dent HSBC’s performance too. I’ll be watching intently on both fronts.
Overall, I believe a stock like HSBC would go a long way in helping me build my second income stream.
