£5,000 in savings? Here’s how I’d aim for an annual passive income of £14,350 within 20 years

A few thousand pounds in savings can kickstart an investment journey that can lead to a highly rewarding passive income stream. Here’s one example.

| 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.

Young Caucasian woman with pink her studying from her laptop screen

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.

Achieving financial independence through passive income requires a well-thought-out and strategic approach. But there’s no better time to start than the present. Sure, there’s always some learning curves along the way but that’s all part of the process. 

While there’s no guaranteed path to riches, investing in dividend-paying companies can be a viable strategy. Even a few thousand pounds in savings can be enough to get the ball rolling.

However, it still involves some risk and requires a healthy dose of dedication and patience.

Should you invest £1,000 in M&G 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 M&G made the list?

See the 6 stocks

Some helpful tips to get started

When starting out, it’s crucial to understand the tax implications. In the UK, using a Stocks and Shares ISA can provide significant tax advantages. UK residents can invest up to £20k per year into their ISA and benefit from a tax break on the capital gains.

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.

Diversification is another key concern. Spreading investments across various sectors and regions reduces risk and enhances potential returns. With a careful blend of growth and income stocks, a portfolio could generate an average yield as high as 7%. Paired with a selection of growth stocks could achieve a further 5% in returns from price appreciation. 

It may seem attractive to cash out dividends as soon as they’re paid but patience is key. Reinvesting those dividends means the returns won’t just grow — they’ll snowball, compounding over time into exponential growth.

An initial investment of £5k would be a good start but for real growth, adding a further £100 or £200 per month would really get the ball rolling.

Let’s consider an example portfolio with the above averages. Starting with £5k and putting in £200 a month, it could grow to £58,280 in 10 years, with dividends reinvested. Assuming the yield maintains an average of 7%, it would pay £3,579 a year in dividends. 

If I kept that rolling for another 10 years, it could reach £226k, paying £14,350 a year in dividends.

What kind of stocks could achieve that?

Maintaining such returns would require a careful selection of stable stocks with reliable prospects. Think big, established FTSE 100 companies like Unilever, BT Group, and GSK. But there’s also some top quality on the FTSE 250 and one I like the look of this month is ITV (LSE: ITV).

Created with Highcharts 11.4.3ITV PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

With a 6.7% yield and a low payout ratio of 46%, I have no reason to worry about payments being cut – unless another economic disaster occurs. Covid caused a cut in 2020 but before that, dividends were paid consistently and increased annually for many years.

However, the broadcaster’s earnings-per-share (EPS) has shot up this year, prompting some analysts to speculate about a reversal. On average, they expect a fall from 10p per share to 8.5p by year-end. That could limit price growth in the short term. 

It also faces intense competition from global streaming giants like Netflix. Its streaming service ITVX has enjoyed some success but this venture remains uncertain against well-established players.

Still, with return on equity (ROE) expected to be almost 20% in three years, I like its long-term prospects. The shares have paid me decent dividends so far and I expect they will continue to do so.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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.

Mark Hartley has positions in GSK, ITV, and Unilever. The Motley Fool UK has recommended GSK, ITV, and Unilever. 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.

Our best passive income stock ideas

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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 »