How much passive income could I earn by investing £3 a day?

£3 a day for 30 years could be like investing £14,000 on day one. Stephen Wright thinks this is a great way to build a passive income portfolio.

| More on:

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.

Having a lot of cash to invest isn’t the most important thing when it comes to passive income. Being able to invest regularly for a long time is a much bigger advantage.

The average price of a pint in London is £6.75. With enough time, investors looking for extra income could generate a meaningful return with less than half of that each day.

What can a £3 habit achieve?

Over 30 years, investing £91 a month – the equivalent of £3 a day – can earn significant passive income. And reinvesting the returns can provide a big boost to this. 

Exactly how much depends on the average return over that time. At an average 5% a year, £3 a day results in £3,524 after 30 years. 

At 7%, the returns are dramatically higher. Investing £91 a month at that rate generates £6,971 a year – or £580 a month – in passive income.

That’s the same as I’d get if I invested £14,000 today at 7% and reinvested the returns for 30 years. So over three decades, £3 a day could be the equivalent of £14,000 today.

Dividend stocks

I think the best place to look for passive income opportunities is dividend stocks. These are shares in businesses that distribute some – or all – of their profits to shareholders. 

Not all dividend stocks are the same though. Essentially, investors typically face a choice between higher yields and better growth prospects. 

Shares in Imperial Brands, for example, come with a 7.25% dividend yield. That’s quite high, but investors need to consider the risk of declining tobacco sales in future. 

By contrast, consumer products company Unilever has much more stable prospects. But the dividend yield is much lower, at around 3.5%. 

A stock to consider buying

Right now, I think Tesco (LSE:TSCO) might be a good stock to consider buying. It currently has a dividend yield of around 4% and I think it looks like an attractive opportunity.

The threat of competition – especially from Lidl and Aldi – is a risk. But its size and scale make Tesco difficult to displace and this shows up in its ability to sell products.

The best retailers shift stock quickly, get more in, and repeat. Imaginatively, the number of times a company turns over its inventory each year is called… its inventory turnover ratio.

Tesco’s ratio is 24. Higher is better and this comfortably beats its nearest competitor Sainsbury (15) as well as the likes of CostCo (13) and Marks & Spencer (11).

Growth prospects

A company like Tesco, with a strong position in an important industry, should be able to increase its dividend over time. And it has done this fairly well over the last decade.

Tesco dividends per share 2015-24

Created at TradingView

As a result, I’d expect to do better than 4% on average over 30 years by buying Tesco shares. That’s why I think it could be a great choice for someone starting a passive income portfolio.

If things go well, I don’t think an average annual return of 7% over the long term is out of the question. And that could turn the equivalent of £3 a day into something substantial.

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.

Stephen Wright has positions in Unilever Plc. The Motley Fool UK has recommended Imperial Brands Plc, J Sainsbury Plc, Tesco Plc, and Unilever 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

Investing Articles

Could this beaten-down UK growth stock be the next Rolls-Royce?

Mark Hartley feels Rolls shares have had their time and are running out of steam. Now he’s searching for the…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Down 10% in a month! What’s gone wrong with the BAE Systems share price?

Harvey Jones suspected all was going a bit too well for the BAE Systems share price. Things went wrong immediately…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Are BT shares still a bargain after climbing 30%?

BT shares are finally showing signs of life after years in the doldrums. Harvey Jones thinks this may point to…

Read more »

Investing Articles

£10k in an ISA? Here’s how I’d aim to generate a ton of passive income

I dream of escaping the shackles of a salary with financial independence and a steady stream of passive income. Here’s…

Read more »

Investing Articles

Are Burberry shares a bargain or a value trap?

Appearances can be misleading in the stock market. Shares that look like a bargain can turn out to be a…

Read more »

Investing Articles

How I’d target £17,673 passive income with just £100 a week

Our Foolish writer explains how he’d build a portfolio capable of generating a life-changing passive income with limited capital.

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

If I’d put £20k into a FTSE All-Share tracker fund 10 years ago, here’s what I’d have now

A lot of UK investors have money in FTSE All-Share tracker funds. Here, Edward Sheldon looks at how these products…

Read more »

Investing Articles

How I’d invest £10k in a SIPP to target £28,000 annual passive income

Investing just £10k today in a SIPP could be the key to a chunky retirement income in the long run.…

Read more »