Let’s be honest, £100 a month would be a small price to pay for potentially life-changing passive income. A small sacrifice today for the promise of a stable and comfortable retirement down the line? Count me in!
Imagine it as a type of monthly subscription service — only there’s no product, just a carefree life in 20 years or so. If only it were that easy, right?
Well, it’s not that unrealistic.
In fact, thousands of UK citizens target this exact method to safeguard their future. Naturally, nobody can guarantee the outcome as there’ll be many bumps along the road.
But no adventure is complete without a few ups and downs. It’s how you navigate them that counts.
The power of £100 a month
You don’t need to be a financial genius or Wall Street wizard to reap the rewards of the stock market. The true skills of a good investor are patience and discipline.
A balanced portfolio and religious dedication to monthly contributions have proven time and time again to pay off.
Consider £100 a month in a portfolio that delivers annualised returns of 10%. After 25 years, that pot would have grown to approximately £147,150. A nice chunk of cash, but not exactly life-changing.
The trick is to make that money work for you through dividends. Realistically, a strictly income-focused portfolio could achieve an average yield of 7%. That means £147,150 would pay out just over £10,000 a year in dividends.
In addition to a State Pension, that amount would ease the pressures of retirement.
Growth and income
This plan covers two parts. Initially, the growth phase aims to reinvest and compound returns as rapidly as possible. Phase two focuses on rebalancing towards income stocks to reap the rewards.
Each phase requires a different type of portfolio.
At the start, the portfolio would benefit from growth-focused stocks like Diploma, 3i Group, and Melrose Industries. These stocks enjoy consistent growth, having delivered some of the highest returns on the FTSE 100 over the past decade.
| Stock | 10-year growth | Annualised returns |
|---|---|---|
| Diploma | 760% | 24% |
| 3i Group | 624% | 21.9% |
| Melrose Industries | 498% | 19.5% |
The second phase would require rebalancing into high-yield income stocks like Admiral Group, British American Tobacco, or Primary Health Properties. These can also be included in phase one, because if you reinvest the dividends, they act like growth stocks.
How it works in practice
Take, for example, one of the UK’s most popular income shares, Legal & General (LSE: LGEN). Its share price has risen approximately 113% in the past 20 years. But when you include dividends in the mix, its total returns surge to 630%.
That’s an annualised return of 10.45%.
So it’s a good stock to consider for a passive income portfolio. During phase one, it contributes to the overall returns and in phase two, its generous 8.8% yield boosts the overall average.
Of course, these are speculative estimates based on past performance. No stock is guaranteed to keep growing or paying out dividends.
And while L&G has an exceptional track record, it isn’t without risk. A recent change in accounting standards risks non-cash volatility in reported profits, which could dent investor confidence and hurt profits.
But complex accounting practices aside, its dividend track speaks for itself. As part of a diversified portfolio, shares like L&G can get an investor started on the journey to a more comfortable retirement.
