How to target annual passive income of over £7,000 with £5,000 in savings!

This Fool wants to start making passive income now, so later down the line he can live a better life. Here’s how he’d start today.

| More on:
Shot of a senior man drinking coffee and looking thoughtfully out of a window

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.

With most of my investments, I try to generate passive income. I know that by doing so, I’m setting myself up for a more comfortable retirement.

I could own property or start a side hustle. But I want to make it as hassle-free as possible. That’s why I love dividend shares.

For very little work, I can start making some extra cash. Warren Buffett once said: “If you don’t find a way to make money while you sleep, you’ll work until you die”.

Here’s how £5,000 in savings could turn into a juicy stream of passive income.

A dividend stock

To achieve this, I’d target shares with index-leading yields. One stock I’d consider buying today is Phoenix Group Holdings (LSE: PHNX). It pays the highest yield on the Footsie at 10.6%.

I think there’s a lot to like about the business when considering its shares. It has plenty of cash on hand. For example, last year it achieved over £2bn of cash generation. Its balance sheet looks in good health with a Solvency II ratio of 176%. And after a positive set of results last year, the firm is now targeting £900m of IFRS-adjusted operating profit in 2026. For context, it was £617m for 2023.

To go with that, it hiked its dividend payment for fours year on the bounce. There are other aspects about the insurance giant that make me bullish, such as its Pension and Savings business.

I do see some risks with the stock. High interest rates continue to pose a challenge. For one, they fuel uncertainty about the economy. They can also impact the valuation of assets. Furthermore, the insurance industry is cyclical and there’s the threat of competition. However, I think Phoenix Group is a quality company with long-term potential.

Crunching the numbers

I want to use Phoenix Group’s yield as an example of how £5,000 can turn into a handsome stream of passive income later down the line. But before that, I point out something.

Dividends are never, ever guaranteed. We only have to look back a few years to the pandemic when numerous companies reduced or slashed their payouts as profits were hit. We’ve also seen it before with events such as the Global Financial Crash. The market is unpredictable, so it’s worth bearing this in mind.

That said, taking Phoenix Group’s 10.6% and applying it to my £5,000 would earn me £530 in passive income a year. That would come in handy. But that’s not going to be enough to supplement my lifestyle when I retire.

To reach a figure that will, I’d reinvest my dividends. By doing so, I’d benefit from compounding. Essentially, I’d be earning interest on my interest. Over the years, this would snowball my gains.

Doing this for 25 years could see my £5,000 turn into an investment pot worth £69,952. By year 25, I’d be earning just over £7,000 a year in interest.

If I had the spare cash, I could invest a further £100 a month. Doing that for 25 years would leave my pot sitting at £217,012. After year 25, I’d be earning £21,669 a year in interest. That would most definitely set me up for a more lavish lifestyle after giving up work.

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.

Charlie Keough 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.

More on Investing Articles

Black father holding daughter in a field of cows
Investing Articles

A FTSE 100 share that could create generational wealth

Investing in FTSE shares can help individuals pass down a significant chunk of cash to their children and grandchildren, data…

Read more »

Investing Articles

Here’s what the BT share price could mean for passive income investors

The BT share price has been falling for years, but that might be about to change. And dividends could be…

Read more »

Investing Articles

At £4.76, is the Aviva share price a steal? Here’s what the charts say!

Aviva has outperformed the Footsie over the last year. But is there still value in its share price? This Fool…

Read more »

Photo of a man going through financial problems
Investing Articles

Does a 43% price drop make this undervalued UK stalwart one of the best cheap shares to buy now?

After losing a third of its value of the past five years, this might be one of the most undervalued…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

My top 3 picks today for a £20,000 Stocks and Shares ISA

Here are three very different investments to consider for a Stocks and Shares ISA, covering both the UK and US…

Read more »

Businesswoman calculating finances in an office
Investing Articles

The Darktrace share price has been surging — and it could climb higher

I think the Darktrace share price could have more room to run. Despite the competitive AI industry, the firm looks…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

With its 7% dividend, should I be watching the Aviva share price?

Dividend investors will struggle to find many companies with a yield above 7%, so should the Aviva share price be…

Read more »

Investing Articles

Could this be one of the FTSE 100’s best cheap dividend shares?

Looking for the best dividend growth shares to buy? Our writer Royston Wild thinks this FTSE 100 housebuilder might well…

Read more »