No savings at 40? How £10 a day could grow into £8,273 of passive income a year!

This writer reckons it’s entirely realistic for an investor to save a tenner a day to aim for an attractive passive income sum in future.

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Popular ways to earn passive income include buying a property to let and starting an online business. However, these ventures normally involve a large amount of upfront capital or time to get off the ground.

In contrast, anyone can start investing in dividend-paying shares, even a 40-year-old starting from scratch with no savings.

Here, I’ll show how an insignificant-sounding £10 a day can eventually grow into a sizeable tax-free passive income stream.

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Making sacrifices

In recent years, the UK has become a much tougher place to live affordably and save money. We can see this cost-of-living crisis all around us, from derelict shops to half-empty restaurants and pubs.

What were once affordable treats are becoming incredibly expensive. For example, some Premier League clubs are tipped to be charging fans upwards of £13 for a pint of beer by 2030! A few cafes are already charging more than £5 for a single cup of coffee, while the price of fish and chips is through the roof.

Still, I firmly believe that a determined individual can save an extra tenner a day and start putting it to work in the stock market. That equals roughly £304 a month or £3,650 per year.

An illustration

The good news is that this figure is well inside the annual £20k Stocks and Shares ISA allowance. This means any income generated in this account would be free from the grubby mitts of the taxman!

Say a person invests their money at an average dividend yield of 6%. In other words, they ought to receive £6 per year back in dividends for every £100 they invest. This scenario would see regular £304 monthly investments turn into £137,000 in just under 20 years. And annual dividends of £8,273!

YearBalance
1£3,748.32
5£21,129.63
10£49,405.84
15£87,245.78
20£137,884.17

Now, there are a few caveats here. First, a company’s dividend should trend upwards over time as its profits grow. This means an income portfolio’s yield should ideally be higher than 6% after two decades.

However, this isn’t assured because companies can run into trouble and cut their payouts. Therefore, diversification is an important tool to offset this risk.

Also, the above figures assume an investor reinvests dividends to really turbocharge compounding (earning interest upon interest). This would mean sacrificing the spending of cash dividends for the chance of a much higher passive income stream in future.

What stocks to consider?

One of my favourite UK income stocks is Legal & General (LSE: LGEN). This FTSE 100 financial services giant currently sports an enormous 9.7% forecast dividend yield for FY25.

Created with Highcharts 11.4.3Legal & General Group Plc PriceZoom1M3M6MYTD1Y5Y10YALL11 Jan 202011 Jan 2025Zoom ▾Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '24Jan '2520212021202220222023202320242024www.fool.co.uk

The company boasts a strong brand in enduring industries like asset management, insurance, and pension products. All are poised for steady long-term growth due to a rapidly ageing population.

Meanwhile, Legal & General maintains a solid balance sheet, ensuring it can weather market shocks.

Admittedly, the share price performance — down 27% in five years — has been disappointing. A financial crisis of some sort could heap pressure on earnings, given the firm manages £1.2trn worth of assets.

However, the company has hinted that the board may increase the current £200m share buyback. That could support a rising share price, ideally.

On balance, I think the stock’s cheap valuation and sky-high dividend yield look attractive. I’m considering buying more shares in the coming weeks.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Ben McPoland has positions in Legal & General Group 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.

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