Here’s how I’d aim for lifelong passive income by investing £200 a month

Building a passive income portfolio takes time, but dividend investors could aim to set themselves up for life with just £2,400 a year.

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Passive income has a powerful appeal. Who wouldn’t want to earn extra cash for minimal effort? I certainly would!

Well, it’s possible to target a passive income stream from dividend stocks that could potentially last a lifetime. I reckon this can be done by investing just £200 a month.

Here’s how.

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Buying my future freedom

Finding £200 to invest each month isn’t easy, but it’s worth it.

I automate my investing. By moving money into a Stocks and Shares ISA at the beginning of the month, I’m not tempted to spend it.

Thanks to the power of compound returns, spare cash I put in the stock market today could be worth much more as time passes by.

Securing passive income for life

So, how much passive income could I earn by following this plan?

A lot depends on my portfolio’s compound annual growth rate (CAGR). For context, the FTSE 100 index has historically returned around 6%-8% annually over long periods.

There’s no guarantee that the UK stock market will continue to deliver these returns in the future. That risk should be borne in mind. Nonetheless, it’s a good benchmark to use for forecasting purposes.

Of course, it’s possible to secure higher gains. A well-chosen mix of stocks could beat the market.

To illustrate these variables, let’s forecast three potential eventualities that could arise from investing £200 per month over a 30-year time horizon.

I’m assuming I could secure an average 5% dividend yield across my shares, which should be achievable with some smart picks. That said, dividends are never guaranteed and companies can cut or suspend payouts during tough times.

Crunching the numbers

If I underperformed the FTSE 100, the numbers could look like this.

CAGRFinal portfolio sizeAnnual passive income
5%£163,772£8,189

If my portfolio matched the index’s historic average, the figures are as follows.

CAGRFinal portfolio sizeAnnual passive income
7%£235,302£11,765

Finally, this is what might happen if I outperformed the Footsie.

CAGRFinal portfolio sizeAnnual passive income
9%£343,086£17,154

Even marginal improvements in my portfolio’s CAGR could produce dramatically different passive income streams when the time comes to spend my dividend payments.

A dividend stock to consider

To aim for the maximum amount of passive income, I’ll need to invest in high-quality dividend stocks. One that’s worth considering is mining giant Rio Tinto (LSE:RIO).

Created with Highcharts 11.4.3Rio Tinto Group PriceZoom1M3M6MYTD1Y5Y10YALL13 Sep 201913 Sep 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '242020202020212021202220222023202320242024www.fool.co.uk

The company’s policy is to pay a dividend ranging between 40% and 60% of its earnings. Granted, the commodities industry is highly cyclical. Investors should expect fluctuations in their passive income payouts.

But, the group’s dominance in the global iron ore market due to its Western Australian operations can’t be overstated. The steelmaking metal accounted for 73% of the company’s first-half underlying operating profit.

Rio Tinto’s also the largest investor in the Simandou project in Guinea — one of the world’s largest untapped reserves of high-grade iron ore. This should cement Rio Tinto’s market-leading position for years to come.

Weak demand from China is an ongoing risk amid a construction slump in the world’s second-largest economy. It’s worth monitoring developments on this front.

Nevertheless, at a forward price-to-earnings (P/E) ratio of 8.4, I think Rio Tinto’s valuation looks attractive today.

Should you invest £1,000 in Sainsbury's 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 Sainsbury's made the list?

See the 6 stocks

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 Rio Tinto plc. 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.

We think earning passive income has never been easier

Do you like the idea of dividend income?

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