£5K in savings? Here’s how I’d turn that into £11,438 of annual passive income!

This Fool explains how she’d invest to create a passive income stream to enjoy later in life and breaks down the steps she would follow.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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.

One of my biggest reasons for investing in UK shares is to build a passive income stream for me to enjoy when I retire.

Let me share how I would aim to do this, as well as an example of a dividend stock I’d buy to help me achieve my goal.

The method and the maths

First things first, let’s say I have £5K in savings right now. On top of that, I’d want to add £200 per month from my wages to top up my pot.

Should you invest £1,000 in Marks and Spencer right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Marks and Spencer made the list?

See the 6 stocks

I need to ensure I’m making my money work hard, and pay the least amount of tax possible, so I can enjoy my earnings. For me, a Stocks and Shares ISA is perfect, as I don’t need to pay any tax on dividends.

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 need to aim to find between 5 and 10 quality stocks with good fundamentals, future prospects, and a decent rate of return.

Crunching some numbers, with an initial £5K, and adding £200 per month, I’m going to invest for 25 years, and aim for a rate of return of 7%.

After this time period, I’d be left with £190,641. For me to enjoy this, I’m going to draw down 6% annually, which equates to £11,438.

At this stage in my life, I’ll have paid off my mortgage and my kids won’t be relying on the ‘bank of Mum’ anymore, so this is a nice pot for me to use on whatever I like.

Of course, this plan has a couple of risks. The biggest issue is that dividends are never guaranteed. Plus, although I’d be aiming for 7%, the eventual payout could be less as stocks come with risks that could hurt returns. Alternatively, it could be more, leaving me with more money.

Asset manager

FTSE 100 wealth manager Schroders (LSE: SDR) is a stock I like the look of for a few key reasons.

Firstly, it’s worth mentioning that the Schroders share price has been the victim of economic pressures recently. The shares are down 14% over a 12-month period from 458p at this time last year, to current levels of 390p.

Created with Highcharts 11.4.3Schroders Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

This drop in price doesn’t concern me. In fact, it makes the shares look even more attractive on a forward price-to-earnings ratio of 12.

Next, a dividend yield of 5.4% is attractive. It’s much higher than the FTSE 100 average of just less than 4%.

Furthermore, Schroders is an established business. With over £750bn worth of assets under management, according to most recent figures, the business is mammoth. In addition to this, the firm has been around for over 200 years. It’s fair to say it knows a thing or two about navigating tricky economic conditions, making money, and rewarding investors.

Despite the bullish traits I’m drawn to, I’m worried about inconsistent inflows in recent years, linked to lower investor confidence. This is primarily linked to the economic turbulence of recent times. With less assets to manage, making money, and rewarding investors can be tougher. This is something I’d keep a close eye on.

Should you buy Marks and Spencer now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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.

Sumayya Mansoor has no position in any of the shares mentioned. The Motley Fool UK has recommended Schroders Plc. 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

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

£10,000 invested in Tesla stock at Christmas is now worth…

Tesla stock has been one of best-performing investments of the past decade. But things haven't gone to plan for investors…

Read more »

Investing Articles

Up 279% in 5 years, could Meta stock keep soaring?

Meta stock has more than tripled in five years. This writer sees lots to like about the business but also…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

25% total return in a year? Is now the perfect time to buy BP shares?

BP shares are on the front line of today's global economic and political uncertainty but analysts think they can still…

Read more »

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

With Cash ISA changes coming, could now be the time to consider buying shares?

Changes to the Cash ISA could lead to greater investment in the stock market. This could be a good thing…

Read more »

Investing Articles

These FTSE 100 dividend shares just got cheaper, thanks to President Trump!

Investors buying dividend shares can lock in bigger long-term yields when share prices take a tumble. These two just did…

Read more »