A little passive income goes a long way, especially during uncertain times. Building an eventual chunky second income doesn’t require a windfall. It simply needs consistency, patience (lots of it) and the willingness to get started.
I’d aim to generate it by investing in FTSE 100 shares. The UK’s blue-chip index is full of established dividend-paying businesses that can potentially generate wealth, year after year, with little effort on my part once the investments are made.
Investing small sums in shares
Some may think investing is only for those with deep pockets. I’d say that’s nonsense. Even small, regular contributions can snowball into something pretty impressive over time. And it can be done from just £5 a day (and in truth, a lot less). That’s the same cost as a daily coffee and croissant. Or in parts of London, just the coffee.
Over a year, that adds up to £1,825. If someone started investing that at age 25, and increased it by just 3% a year to stay ahead of inflation, they could end up with a pot worth around £862,462 by age 67. The key is to stick with it.
This assumes 8% annual growth. That’s slightly above the FTSE 100’s historical average of around 7%, but potentially achievable by picking higher-yielding or faster-growing individual shares. Of course, that involves more risk.
One to watch
I think Asia-focused bank HSBC Holdings (LSE: HSBA) is worth considering today, both for passive income and share price growth.
The banking giant hasn’t escaped recent stock market jitters, falling around 10% over the last month. Still, it’s up 20% in the last year, and has nearly doubled over five years, with dividends adding even more to investor returns.
The current yield stands at a healthy 6.1%, with the stock trading on just 8.5 times earnings, which looks good value to me. But there are challenges. HSBC’s large exposure to Asia, particularly China, puts it on the front line of the ongoing trade war with the US. Its board’s attempting to navigate this by splitting the group into two operations, but it’s a delicate balancing act.
There’s also the risk of a global recession slowing lending and increasing defaults. Still, I see these more as short-term issues. Long-term, I believe HSBC could continue to reward patient investors with attractive total returns. Right now, it may even be a good moment to buy in.
FTSE 100 dividends roll up
No investor should go all in on just one stock. Instead, they should aim to build a portfolio of around 15-20 shares to balance out the risks.
Now let’s say an investor did build a £862,462 portfolio by age 67. If they got an average yield of 5% a year from a spread of dividend-paying shares, they would potentially get £43,123 of income a year.
Most companies try to increase their dividends year after year as profits rise, potentially producing a rising income too.
FTSE 100 stocks won’t make anyone rich overnight. But for those prepared to think long term and invest regularly, they can be a surprisingly effective route to passive income and a more comfortable retirement.
