£9,000 in savings? Here’s how I’d aim to turn that into £400 of monthly passive income

There are plenty of ways to earn a passive income, but few are as tried and tested as investing in stocks and shares. Dr James Fox explains.

| 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.

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.

Investing in stocks and shares is one of the most effective ways for me to generate passive income. By purchasing shares in companies, I can benefit from capital appreciation and dividends over time.

This strategy allows my money to work for me, providing a steady income stream without active involvement. With careful research and a diversified portfolio, investing in the stock market can be a rewarding path to financial freedom and long-term wealth accumulation.

What’s more, when I invest through a Stocks and Shares ISA — available through all major brokerages — all my earnings will be tax-free.

So how would I turn some savings, say £9,000, into a passive income that could truly change my life? Let’s take a look.

Compounding’s king

When it comes to building my portfolio for passive income, Compounding’s definitely king. Starting with £9,000, I have a solid foundation to harness the power of compound growth. By reinvesting dividends and capital gains, my initial investment can snowball over time, potentially growing exponentially.

To maximise compounding, I should:

  1. Diversify my investments
  2. Reinvest all returns automatically — growth-oriented companies typically reinvest earnings anyway
  3. Make regular additional contributions to increase the pace of growth
  4. Maintain a long-term perspective

Time’s my greatest ally in this process. The longer my money compounds, the more dramatic the results can be. For example, assuming an average annual return of 7%, my £9,000 could grow to over £35,000 in 20 years without any additional contributions.

However, if I make sensible investment decisions, my portfolio can growth much faster than that. For context, my daughter’s portfolio grew 35% in her first year. It’s going well in year two as well. Good investors can easily average double-digit returns.

So if I were to average 10% annualised growth, after 20 years my £9,000 would be worth £65,000. That’s without any additional contributions. And with £65,000, well, I could generate around £400 a month by invest in high-dividend yielding stocks.

But where to invest today?

At the time of writing, the Nasdaq is near an all-time high, US mega-cap stocks are trading at high multiples, the market’s digesting Labour’s first Budget, and the US election’s next week. This doesn’t make stock picking easy.

One interesting option to consider could be Greencoat UK Wind (LSE:UWK). This renewables fund currently trades at a 15.9% discount to its net asset value (NAV) — the value of its assets according to auditors — and offers investors a 7.5% dividend yield.

Greencoat UK Wind’s unique dividend growth policy, linked to RPI, is an attractive proposition. However, with RPI falling to 2.7%, the 2025 dividend increase is expected to be significantly lower than this year’s 14.2% rise. 

It’s also worth noting that the company’s performance is inherently dependent on the weather. Regardless of what management does, if the wind doesn’t blow, the fund will experience a bad quarter.

Nonetheless, I feel that’s baked into the prices we pay for wind-focused investments. It’s a sector benefitting from government backing and renewed investment under Labour. The lifting of a de-facto ban on onshore wind farms should be a long-term boost.

All-in-all, I’d back this firm to deliver double-digit returns over the long run. That’s the 7.5% dividend yield — which will rise relative to our buying price today — and share price appreciation of at least 2.5% annually.

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.

James Fox has no position in any of the shares mentioned. The Motley Fool UK has recommended Greencoat Uk Wind 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

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 »