Earning a passive income that doubles the State Pension may sound like an unrealistic target to many individuals. But by investing money across a range of quality UK shares, the results can be quite impressive over the long run. And even with the FTSE 100 nearing record highs, there remains plenty of quality businesses trading at low valuations.
Right now, the full UK State Pension is just shy of £12,000 a year. So with that in mind, let’s explore three simple strategies to aim for twice as much.
Three simple tactics
If the goal is to earn £24,000 a year, then following the 4% rule indicates an investor needs to build a £600,000 portfolio. That’s not a trivial sum. But by leveraging the compounding returns of the stock market, it’s an achievable goal in the long run.
However, investing in stocks isn’t risk-free. Buying shares is a serious endeavour that requires patience and discipline. Yet, there are some basic steps investors can take to avoid horrendous mistakes and achieve their passive income goals.
- Ignore the short-term noise and focus on playing the long game.
- Diversify across multiple businesses from a variety of industries.
- Stay consistent.
Number one is arguably the hardest, given how easy it is to panic when the market throws a tantrum. But the evidence is clear, holding through the storm and capitalising on bargains leads to significantly better outcomes. Number two is the most tried-and-tested way of keeping risk in check, while tactic number three is what enables compounding to deliver jaw-dropping results.
By systematically drip feeding £500 each month into a low-cost FTSE 100 index fund at an admittedly-not-guaranteed 8% average annual return, a £600,000 portfolio could turn from a dream into reality in 28 years.
Accelerated wealth
For those willing to take on more responsibility, picking quality stocks directly can drastically shorten the timeline to earning twice the current UK State Pension.
For example, in the last decade, Premier Foods (LSE:PFD) has been enriching many shareholders, delivering a 17.9% annualised return since 2015, enough to cut down the waiting time by over a decade. How? By leveraging an iconic brand portfolio of consumer products, taking market share from competitors, and establishing pricing power.
Today, brands such as Mr Kipling, Sharwood’s, Ambrosia, and Bisto can be found in almost every supermarket. And when combining this steady expansion with a continuous strive for operational efficiency, the result is a highly profitable and cash-generative food business.
The firm continues to excel, delivering a 21% gain over the last 12 months. But even high-quality businesses have their weak spots. With its products already in so many stores, sales volumes have started to slow, making it increasingly reliant on its pricing power to supply growth.
So far, that hasn’t been a problem. But prices can only be hiked by so much. In other words, there are limits to this growth strategy. That’s why developing or acquiring new products and brands will undoubtedly be crucial for long-term success. But that also introduces the risk of poor execution.
To date, these headwinds haven’t stopped Premier Foods from excelling. And with an impressive track record, that makes it a firm worth investigating further, in my opinion.
