It’s possible to make a passive income stream from UK shares, if you’re willing to be patient. The key is to start buying shares as soon as possible and reinvest all of your dividends for long-term growth. The best part is that you don’t actually need a lot to start with. It could be as little as £25 a week. Far less than a night out for many people. Over time this modest sum, consistently invested well could turn into a sizeable financial nest egg that could help you retire early or achieve other life goals.
Creating a passive income from a small sum of money
Building a passive income needn’t be daunting or complicated. Plan to set aside £25 a week from your earnings as a starting point and add this as cash to an ISA. Over time a pot will grow to a size where it will become large enough that you can invest it into UK shares without the costs eating up too large a percentage. Avoiding overtrading and its associated costs is an important factor in helping create a passive income that can help you achieve your aims.
How to invest in UK shares
To create my passive income I’d take the £100 a month I save and accumulate it within an ISA to avoid unnecessary tax expenses. Then I’d invest in the stock market when I have at least £400 to buy shares with. My plan to create a passive income involves buying shares in companies paying dividends, but I don’t want to buy the highest yielding shares. Most companies with very high yields actually face big challenges and are at risk of cutting their dividends.
Instead, I’d target companies with a sustainable yield of around 3% to 5% and that have potential for growth in dividend income and share price. FTSE 100 companies such as Unilever, Admiral, and GlaxoSmithKline all potentially fit into this category. Extending into the FTSE 250 will give even more options. Be aware though, those companies can be more UK focused, which in the short term may present challenges with Brexit about to dominate the news again.
Of course, if you don’t want to choose your own shares directly you could invest in an ETF, otherwise known as a tracker. These have the benefit of being very cheap. Or you could look to outsource to a professional and buy shares in an investment trust.
The benefit of compounding
Lastly, if you’ve read articles on The Motley Fool before you’ll likely know we’re fans of compounding. This is about earning more and more dividend income over time that can be reinvested into more and more shares. That in turn will produce even more passive income. My plan is to invest a little for the long term and that way I calculate I can retire with enough money to enjoy life.
Andy Ross owns no share mentioned. The Motley Fool UK has recommended Admiral Group, GlaxoSmithKline, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.