It’s a widely accepted truth that it takes money to make money. When it comes to earning passive income on the stock market, this is doubly true.
But how much does an investor need to save before they can get started? While no specific number exists, it is worth calculating a realistic estimate.
Counting coins
These days, the barriers to entry on the stock market are far lower than in the past. Investors no longer need a large initial investment or an expensive broker.
With as little as £5, a beginner can start buying penny stocks or fractional shares with a free mobile trading app. But to earn a meaningful passive income would require a much larger lump sum, or a dedicated strategy to build up to one.
Say, for instance, a portfolio returns on average 10% a year. It would need £100,000 invested just to return £10,000 a year — less than £1,000 a month. So as we can see, to earn meaningful passive income requires a fairly hefty investment.
It’s never too late to start
A 50-year-old without notable savings might feel they have no chance of ever achieving their goals. But many people underestimate the miracle of compounding returns.
Let’s say the investor has a £5,000 initial investment and can afford to contribute £300 a month. Even if the portfolio achieved only a moderate 7%-8% average return, it could grow to £176,000-£200,000 in 20 years.
The trick is to formulate a realistic strategy, stick to it, and be patient. Trying to rush wealth generation by investing in risky stocks is a surefire way to suffer losses.
A balanced approach
Markets go through cycles of growth and depression and it’s near impossible to time them accurately. A popular strategy to combat this is by spreading risk across a range of different investment types.
One stock for investors to consider is the gas and electricity supplier SSE (LSE: SSE), exhibiting several benefits for a portfolio. With a 3% dividend yield and a share price up 52%, it’s delivered a total return of 96% in five years. That equates to an annualised return of 14.4% a year.
As a regulated utilities company, it also adds defensiveness to a portfolio. Even during recessions, people need gas and electricity, so it offers more stable returns. This is critical when targeting passive income.
The recent announcement of a £33bn five-year network upgrade plan led to a surge in share price, adding growth credentials to the stock. Overall, it ticks all the boxes for a balanced growth- and income-orientated strategy.
However, it still faces execution risk in its upgrade plan, not to mention the potential cost of any regulatory changes. It already holds a lot of debt, so any dip in earnings could delay expansion.
The bottom line
For most investors, targeting passive income is a journey rather than once-off investment. The sooner it’s started, the better — but it’s never too late.
The key is building a balanced portfolio, sticking to the monthly contributions, and remaining calm when markets wobble.
