I often find myself day dreaming about building a chunky passive income. The urge to escape the 9 to 5 by establishing a sizeable alternative source of income is a strong one.
The hard part is figuring out where to start. Now, I’m not fortunate enough to be sitting on a spare £10,000 in cash. However, other investors out there may be.
Here’s how they could try to turn that into a sizeable passive income by investing in a handful of top UK stocks.
Passive income stocks: our picks
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!
Building a chunky passive income
With some cash in the bank, the first question is where to invest that for the future. There is a long list of FTSE 100 stocks that pay solid dividends and could potentially provide a passive income stream.
Compared to growth shares that tend to reinvest in the business rather than distribute profits to shareholders, dividend stocks can provide a regular source of additional income. If investors reinvest those dividends rather than pocket the funds, the magic of compounding returns can really turbo charge portfolio growth.
There are many companies that have high dividend yields right now. Rio Tinto (LSE: RIO) and Legal & General (LSE: LGEN) are a couple that spring to mind.
Rio Tinto is a global mining giant that is yielding 6.7% right now, while Legal & General is one of the largest UK financial services and asset management companies, with an 8.7% yield.
An equally weighted portfolio of these two Footsie stocks would therefore have a 7.7% yield. That’s pretty handy if it holds up in the long run.
Let’s dive into the maths. A day one portfolio of £10,000 really isn’t going to deliver enough as a sustainable income stream. However, let’s fast-forward a decade and see what could happen.
With reinvested dividends, that portfolio could be worth £21,500 in 10 years time. After 20 years, that 7.7% dividend yield would help propel the portfolio to over £45,000.
What if an investor also invested £500 every six months on top of that initial lump sum? That £10,000 portfolio could be worth over £200,000 and throwing off nearly £8,000 in annual dividends by year 30. Assuming no share price movements, that is a pretty handy second income.
Choosing the right stocks
Now, this is all easier said than done. Share prices do move and dividend yields change, so I personally think diversification and a long-term perspective are essential.
Rio Tinto is one Footsie stock that investors could consider buying. The global mining giant has a market cap of £84bn with a 6.9% dividend yield right now. I have been watching it lately, and even assuming no change in share price, I think that it could be a very handy little earner on the side.
There are some complexities around the stock. A dual-listing structure in Australia and recent controversial mining practices have created some question marks for investors.
However, the company is a global leader in mining key minerals that are required for the energy transition over the coming decades.
