Here’s how I’d invest to try and unlock £63,000 in annual passive income

This Fool highlights a UK stock that could drive some tasty returns in future to help build a portfolio that generates sizeable passive income.

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There are a handful of proven ways to make passive income nowadays. My own choice is to regularly invest in companies through the stock market, with a focus on the long term.

The wealth-building record of stocks is well-documented. Just look at some of the world’s richest people: Warren Buffett, Elon Musk, and Mark Zuckerberg. Their rising wealth corresponds with the flying share prices of their firms: Berkshire Hathaway, Tesla, and Facebook-parent Meta Platforms, respectively.

5-year share price return
Berkshire Hathaway112%
Tesla1,312%
Meta144%

Or take Jensen Huang, founder of AI chipmaker Nvidia. His net worth has ballooned from $3bn five years ago to around $100bn today. That’s after Nvidia’s mind-boggling 2,743% share price gain in that time.

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Even attaining a tiny slither of such returns could be life-changing for most investors.

Created with Highcharts 11.4.3Nvidia PriceZoom1M3M6MYTD1Y5Y10YALL20 Jul 201920 Jul 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '242020202020212021202220222023202320242024www.fool.co.uk

The strategy

Let’s assume I invest £20,000 in dividend stocks today inside a tax-efficient Stocks and Shares ISA. If these were collectively yielding 7%, that means I could expect to receive £1,400 in passive income each year.

This presumes all my stocks continue to pay their dividends, which isn’t guaranteed. That’s why it’s important to build a diversified portfolio to offset this cancellation risk.

While £1,400 is a decent yield, I’d prefer to forgo this passive income stream in favour of a potential torrent in future. My main focus then would be on building wealth rather than taking income now.

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.

Small-cap opportunity

Right now, I think there are lucrative opportunities in the UK small-cap space. Many of these firms derive a good chunk of their sales domestically, and as the UK economy has struggled, so has the sector.

However, the UK economic outlook is improving, with falling inflation widely expected to lead to multiple interest rate cuts by the Bank of England.

Buoyed by this, the FTSE SmallCap Index has risen almost 8% in 2024. Yet it’s still nearly 10% off its high from 2021, suggesting more might be to come.

hVIVO

One small-cap UK stock I’d add to with spare cash is hVIVO (LSE: HVO). It’s trading 20% lower than it was in April 2021, yet the firm is still growing nicely.

Created with Highcharts 11.4.3hVIVO Plc PriceZoom1M3M6MYTD1Y5Y10YALL20 Jul 201920 Jul 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '242020202020212021202220222023202320242024www.fool.co.uk

For those unfamiliar, this is a healthcare firm specialising in human challenge clinical trials. These involve healthy volunteers (which it recruits through its FluCamp platform) being exposed to a virus in a controlled setting to test vaccine efficacy.

The company ran the world’s first human challenge trial for Covid and today works with a growing number of large global pharmaceuticals.

Last year, it reported record revenue of £56m, up from £48.5m in 2022, while adjusted earnings per share grew 32% to 1.27p.

Source: hVIVO 2023 annual report

One risk here would be something going wrong in a large trial, which could cause reputational damage.

Looking ahead though, things look very bright. hVIVO is aiming for annual revenue of £100m by 2028 and has even started paying a dividend, which demonstrates its improving financial situation.

The target

So, on top of my £20k, let’s say I invest £700 each month into promising stocks like this and achieve a 9% average return. In this scenario, I’d grow my portfolio to an impressive £913,000 in just under 25 years.

Then I could move into dividend stocks. If that 7% yield is maintained, these would be paying me a £63,000 annual second income.

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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.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Ben McPoland has positions in Tesla and hVIVO Plc. The Motley Fool UK has recommended Meta Platforms, Nvidia, and Tesla. 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.

Pound coins for sale — 51 pence?

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

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