There are many ways for investors these days to secure a life-changing passive income stream. But in my experience, the best way is by building a strong portfolio of reliable UK value shares.
Investing in stocks and shares doesn’t require a huge sum of money to get started. And there aren’t many other asset classes that have been known to provide the same long-term returns that equities do.
Even with as little as £3,000 invested today, I could work towards securing myself a second income of £500 a month to spend as I wish. Here’s the method I’d use to do it.
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Lay the foundations
First, I’d choose the best investment account to ensure I get to keep the most of my profits. All brokerages charge fees so it’s always best to shop around for the cheapest one. But the best way to reduce outgoings is with a Stocks and Shares ISA. It allows investments up to £20,000 a year without paying any tax on the gains.
A Self-Invested Personal Pension (SIPP) is another great investment account with tax benefits. Depending on earnings, it allows up to £60,000 a year of tax-free 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.
Choose the right shares
With an account chosen, it’s time to get down to the real action — picking stocks. There’s a wealth of great dividend-paying shares on the FTSE 100 and FTSE 250. These types of shares regularly pay out a percentage of profits to investors, on top of any gains from price growth. This is a great way to aim for reliable, long-term returns.
A good example to consider is Liontrust Asset Management (LSE: LIO), a London-based investment manager. It boasts an impressive dividend yield of 9.4%, currently paying out 72p per share. What’s more, the yield has been steadily increasing over the past 10 years, from 1.6% to a high of 11% last year.
Sadly, the share price took a huge hit in the past two years as inflation decimated the economy. After growing 1,000% between 2010 and 2020, an increase in client withdrawals dragged the price back down to pre-pandemic levels.
Now it looks like it might be ready to surge again.
Fresh inflows into its European dynamic fund helped its Assets under management and advice (AuMA) nearly double to £1.4bn last quarter. The share price has now recovered 27.2% already this year and looks set to continue as the wider economic situation improves.
Calculating returns
If the dividend yield continues to grow at the current rate and the share price provides 5% annual returns, what gains can I hope for from £6,000? Well, if I held the shares and reinvested the dividends for 11 years, I could expect it to grow to £41,340. At that point, it would pay annual dividends of £6,162 — slightly more than £500 per month in passive income.
Of course, there’s no guarantee that those figures will hold. This is why I would spread my investment over several similar dividend-paying shares. That would protect me from a single failure and provide a better chance of achieving my goal. Remember: dividends aren’t guaranteed — a company can choose to cut them at any time.
Diversification is key to a resilient passive income portfolio!
