It’s never too late to start an investing journey in pursuit of passive income. But getting the ball rolling early on can make an enormous difference, even across just a few years. £500 a month is more than enough to build a significant second income stream in the long run. And for those that started from scratch five years ago, they’re already have potentially generated £2,100 in their sleep.
Earning from a portfolio
Typically, investors seeking passive income will focus on dividend stocks. While that’s a perfectly workable strategy, growth stocks are still a viable alternative choice. And when picked prudently, growth stocks can offer substantially better capital gains to build up a portfolio.
To demonstrate, let’s take a look at the long-term performance of the FTSE 100 and FTSE 250. The former is by far more popular for its chunky dividends and relatively stable performance, driven by mature industry titans. As such, since its inception, investors have reaped annualised returns of roughly 8% a year. By comparison, the FTSE 250 has been a far more volatile beast, with small- and medium-sized businesses rising and falling. But among this seesaw behaviour, total returns have inched closer to 11% a year.
A 3% difference may not sound like much, but when compounded over decades, it makes an enormous difference.
£500 invested each month at these rates five years ago is now worth £36,738 and £39,759 respectively. But for those who started a further 10 years earlier, the gap grows exponentially to £173,020 and £227,345. And following the 4% withdrawal rule, that’s a potential passive income of up to £9,094 without having to work a single extra day in the year.
Pushing things further
Generating a near-11% annual return sounds easy on paper since there are plenty of FTSE 250 index trackers available.
Unfortunately, in recent years, the UK’s growth index has underwhelmed. Even when measuring since the lows of the 2020 pandemic, index investors have only averaged 6.9% annualised gains.
Having said that, not all of its constituents have lagged behind. Games Workshop (LSE:GAW) has delivered explosive results with an average annualised gain of 21%! To put that into perspective, investing £500 a month for five years at this rate translates into a portfolio worth £52,340, or £2,100 passive income.
The Warhammer miniature manufacturer has continued to expand the audience for its IP with new miniature releases for its various tabletop games worldwide. And despite economic woes still plaguing economies worldwide, customers are still rushing to get the latest box sets and army kits. In fact, just a week ago, the group launched its pre-orders for new Warhammer 40,000 Chaos faction miniatures – some of which sold out in under five minutes.
With more miniature releases planned in 2025 and beyond, the growth engine still has plenty of fuel. There is the risk of tariff-related disruptions. After all, the company manufactures all of its products in the UK and then exports them to warehouses across the globe, including in the US, which is a core market.
Given the already premium price tag of these products, even a 10% added import tax could hurt American sales volumes. Nevertheless, with Warhammer becoming evermore popular, supported by a cult-like customer base, it’s a business that investors might want to inspect more closely.
