Can you put a price on a cup of coffee? I mean, sure, you walk into a Starbucks and will be given a price. It’s a big outlay nowadays too. A cappuccino can set me back five pounds and change. But that price tag could turn into something very different if I invest it, where small sums can turn into big sums and handsome passive income, given enough time and know-how.
My Foolish colleague Royston Wild showed as much in this article. He took a £5.40 saving and showed how it might reach £2.4m over a reasonable timeframe. And while I don’t have a daily coffee habit to slash out of my budget, it did get me wondering where else I might be able to carve out little pockets of savings.
Give it up?
For my own situation, I’d like to think of the matter in the amount of passive income I receive. In particular, I’m interested in what it would take to start receiving the amount to buy a coffee every day. In short, how can I build a passive income stream of £5.40 a day from giving up the cups of coffee?
Let’s start at the end. If I target a 5% dividend yield from a smattering of high-quality income stocks, I’d need £39,420. That’s a lot of coffee or coffee equivalents. But by rerouting my Costa fund and putting it to good work in the stock market, I could get that back in just over a decade. Skip the coffee now, in 11 years (roughly) get £5.40 a day from investments. Not bad.
My calculation is based on a 9% total return from whatever I invest in. Getting this key part of the equation right or wrong can result in my income being substantially higher, or lower.
Yellow stickers
One stock I hold and I’m bullish on beating that figure in coming years is Tesco (LSE: TSCO). The stock’s up 31% in the last year and pays a tasty 3.41% dividend.
It’s a defensive stock too. It could perform well even with a spot of economic malaise. Sales in food and essentials (including a certain caffeinated product) are the last things to stop getting bought.
The company is a clear leader with nearly double the market share of its closest competitor. That offers efficiencies through economies of scale – a huge boon in a cut-throat sector. Its customers seem to agree too. At least Its Clubcard is incredibly popular with over 20m members coming back for yellow stickered discounts.
On risks, a hefty employer’s NI bill has just been handed to it. A price-to-earnings ratio of less than 20 is hardly the cheapest either. Overall though, I see the stock as reasonable value. I think this is one for investors to consider in pursuit of a passive income. I reckon I’ll pop over there to pick up some instant coffee now too.
