Here’s how investing £10 a day could create passive income of £27,573 a year!

Charlie Carman explains how he’d build a sizeable passive income portfolio over time by investing a tenner a day in dividend stocks.

| 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.

Passive income text with pin graph chart on business table

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.

Buying dividend shares is a simple strategy investors can follow to generate passive income. Not only do they provide shareholders with regular cash payouts, but they also offer potential capital growth.

The average annual post-tax UK salary is £27,573 according to the latest ONS figures. I think it’s possible to generate that sum in dividend payouts by investing as little as £10 a day.

Here’s how I’d aim to achieve that goal.

Should you invest £1,000 in NatWest Group 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 NatWest Group made the list?

See the 6 stocks

Embracing risk

Dividend investing involves risks. Share prices can crash. Dividend income may not keep pace with inflation. Plus, dividend payments aren’t guaranteed since they can be cut or axed altogether.

Keeping a solid emergency fund in cash, carefully researching potential investments, and diversifying my portfolio across different companies and sectors are sensible ways of mitigating potential pitfalls.

However, ultimately investors need to become comfortable with risking their capital. After all, the other side of the coin is a potentially significant reward — a lifelong stream of substantial passive income.

Compound returns

So, how long would it take to earn £27,573 in annual passive income with £10 a day?

There’s no exact answer to this question. It’ll depend on my portfolio’s compound annual growth rate (CAGR) and the aggregated yield across my stock market holdings.

Currently, the average dividend yield for FTSE 100 stocks is 3.6%. Since I’d be investing exclusively in dividend shares, I’d aim for a higher overall yield of 5%.

That means I’d need a portfolio worth £551,460 to reach my target passive income stream. Even marginal improvements in my portfolio’s growth rate can drastically cut the time to build sufficient wealth, as the below table illustrates.

CAGRTime taken
4%49 years, 4 months
6%39 years, 2 months
8%33 years, 0 months
10%28 years, 8 months

Smart ways to boost my returns include reinvesting dividends and opting for commission-free brokers. I could also use a Stocks and Shares ISA to shelter my portfolio from the taxman or a SIPP for tax relief on my investments.

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.

Dividend ideas

Now, let’s consider which dividend stocks investors like me could buy.

High-yield shares have an obvious appeal, but they’re often riskier than Dividend Aristocrats with solid distribution histories.

Other options include exchange-traded funds (ETFs) or real estate investment trusts (REITs). Of course, there are considerable advantages to investing in a diversified mix of all the above.

For example, one dividend stock I own is FTSE 100 pharma giant GSK (LSE:GSK).

Created with Highcharts 11.4.3GSK PriceZoom1M3M6MYTD1Y5Y10YALL17 Jun 201917 Jun 2024Zoom ▾Jul '19Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '242020202020212021202220222023202320242024www.fool.co.uk

There’s plenty about the company to excite value investors. Its forward price-to-earnings (P/E) ratio of 10.3 is much lower than that of major competitors like AstraZeneca.

In addition, the 3.7% dividend yield is decent enough and crucially, forecast cover of 2.6 times earnings suggests there’s a healthy margin of safety.

Granted, the business faces its fair share of challenges. A recent US court ruling has allowed 75,000 personal injury lawsuits against the firm to progress, which could expose it to costly awards. The claimants allege that GSK’s heartburn drug Zantac causes cancer.

Litigation difficulties aside, GSK recently upgraded its full-year guidance. Demand for the company’s blockbuster medications for shingles, HIV, and respiratory illnesses should remain strong regardless of economic cycles.

Overall, I think it’s a stock worth considering for a diversified passive income portfolio.

But this isn’t the only opportunity that’s caught my attention this week. Here are:

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

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.

Charlie Carman has positions in AstraZeneca Plc and GSK. The Motley Fool UK has recommended AstraZeneca Plc and GSK. 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.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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 »