Earning a passive income without needing to work might sound too good to be true. But stock market investors have been leveraging their savings for decades to buy assets that make money while they sleep.
So, for those lucky enough to have substantial cash savings or who’ve recently received an inheritance windfall, investing in shares today can be a lucrative long-term move. Here’s how.
Turning £100k into a £10k income
Having £100,000 saved up in the bank is a pretty impressive milestone, and more than enough to kickstart a diversified, winning, passive income portfolio. But if the goal is to earn £10,000 a year from dividends, this means an investor will need to earn a 10% dividend yield.
Some FTSE shares are offering such a substantial payout today. But most come with exceptional levels of risk that could actually end up destroying wealth rather than creating it.
A far more reasonable and realistic yield that’s sustainable often sits near 5%. And at this payout, a portfolio will need to be worth around £200,000.
Therefore, step one is to double the size of the £100k starting capital. The good news is, this isn’t all that difficult.
The UK stock market typically generates an annualised return near 8%. And assuming this continues in the future, a £100,000 portfolio could double in approximately nine years. Once that’s done, the task now switches to unlocking a sustainable 5% yield.
A 5% income opportunity in 2026
Let’s assume an investor has already been building wealth over the last nine years and has just hit their target of £200,000. What income stocks should they be considering to unlock a 5% yield?
Looking across the FTSE 350, there are currently over 60 dividend-paying shares offering a payout of 5% or more. And among these stands BP (LSE:BP.).
Following a recent strategic reset that slowed renewable spending and ramped up investments into expanding oil & gas production, management is aiming to reposition the business to become more profitable.
Given the firm has a large pile of debt, investors welcomed the move, and it even supported a near-40% share price rally since April last year.
However, the strategic pivot also significantly increased the group’s exposure to swings in oil & gas prices. And right now, that’s proving to be a potential challenge. Why? Because BP isn’t the only group ramping up production. And as a consequence, oil prices have been steadily falling over the last two years.
What now?
With fixed operating costs, falling commodity prices directly pressure BP’s margins. But there’s hope that increased production from new projects in 2026 will offset this earnings impact through higher volumes. And if prices stabilise, dividends could continue to flow into shareholder pockets, even if margins are compressed.
Of course, the opposite is also true. If oil prices continue to suffer, the group’s vulnerable future cash flows could prove insufficient to cover shareholder payouts. This external uncertainty doesn’t personally entice me to buy. But for passive income investors optimistic about the outlook for fossil fuel prices, BP shares could be worth a closer look.
