Generating sizeable passive income is a dream of many people. But barring an enormous starting sum, it isn’t going to happen overnight. The reality is that it’s going to take years of consist investments to build up a portfolio large enough to regularly throw off oodles of cash.
The good news though is that it is perfectly possible to achieve. Moreover, by building the portfolio inside a Stocks and Shares ISA, there will be no tax liabilities on contributions up to £20k a year.
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.
A smorgasbord of opportunity
Anyone starting their investing journey quickly realises just how much choice there is. Below are four types of investments that many UK investors use to build up their portfolios:
- Dividend shares: companies that pay regular dividends to investors (e.g., BP, HSBC).
- Growth stocks: businesses focused on expanding rapidly (Amazon, Nvidia, etc.).
- Exchange-traded funds (ETFs): these track a market index like the FTSE 100, S&P 500, or a specific sector like technology.
- Investment trusts: closed-end investment companies that trade on the stock market (e.g., Scottish Mortgage Investment Trust, F&C Investment Trust).
This smorgasbord of options provides plenty of opportunities to generate solid long-term returns.
Balanced approach
For someone investing £750 regularly each month, one approach could be to split the amount into two of the buckets above. For example, consider investing £375 into a US growth stock and £375 in a UK dividend share. Then the same the next month with an ETF and investment trust, and so on.
Investing this way would build a balanced portfolio after just a few months.
One FTSE 100 stock I think is worth considering is Coca Cola HBC (LSE: CCH). Not to be confused with the Coca-Cola, this is a bottling partner for the US beverage giant.
It operates in 29 countries across Europe, Africa, and Asia, selling Coca-Cola brands like Sprite, Fanta, and various water, juices, energy, and coffee drinks (including Costa Coffee). These range from developed markets like Italy and Greece (where tourism drives sales) to emerging ones like Egypt and Nigeria.
Revenue has increased from €6.6bn in 2018 to an expected €10.7bn last year. Analysts expect that to tick up to around €13bn by 2027.
The company is also solidly profitable, with the dividend growing nicely over the years. While the forward yield of 3.2% might be nothing to write home about (and dividends aren’t guaranteed), I think the combination of steady growth and income potential is attractive.
The valuation is also reasonable, with the stock trading at 13.8 times this year’s forecast earnings. That’s broadly in line with the FTSE 100 average.
Looking ahead, a global spike in inflation is a risk to sales growth, while a fair few Muslim consumers continue to boycott US brands in Egypt.
Nevertheless, the stock looks good value to me, making it suitable as a potential starter share.
Dividend income
With a portfolio including stocks like this, I think it’s realistic to aim for an average 10% annual return.
Investing £750 a month then, it would take just under 30 years to reach £1.5m (excluding any platform fees and with all dividends reinvested). That’s starting from scratch!
At this point, a £1.5m portfolio yielding 6% would be generating roughly £90,000 a year — or £7,500 a month on average — in dividends. Happy days.
