I think it’s relatively straightforward to build a passive income stream with just a small daily investment. Today, I’m going to explain how I plan to use this approach to cover some of my monthly spending needs.
Building a passive income
The first step on a passive income journey is to build a savings pot. The size of savings required depends on your passive income target. Some investors will want to earn a lot of money every month. Others may have a more moderate target.
I’m targeting a monthly income stream of £500. This will cover the majority of my housing costs, which should help me save more in future.
With a monthly target of £500, or £6,000 a year, I reckon a savings pot of at least £150,000 is needed to achieve this target.
My figures tell me it may be possible to hit this target with just £10 of investment per day. It won’t happen overnight. But by sticking to a regular investment plan, I think it’s possible to hit this target.
Building the pot
An investment of £10 a day works out at roughly £3,650 a year. That’s £304 a month. By investing this money in the stock market, I may be able to rapidly hit the £150,000 target required to build a passive income stream.
You see, over the past 120 years, UK stocks have produced an average annual return of around 7%. Due to the size and length of this study period, I think it’s sensible to rely on this as a possible return target going forward.
At a compound annual growth rate of 7%, I calculate it’s possible to build a savings pot worth £150k in just 20 years. This is only a rough guide. It may be possible to hit this target sooner if you can save a little bit more every month.
For example, it may be possible to hit the target within 14 years with an investment of £500 a month. And if you can afford to invest £1,000 a month, it would take less than 10 years, according to my calculations.
Generating an income
The best way to generate an income on this lump sum may be to buy a basket of high-quality blue-chip stocks. The UK market as a whole currently offers a dividend yield of 3.5%. That would produce a passive income stream of £5,300 a year.
Some stocks offer dividend yields that are above average. Life insurance group Phoenix and car insurance giant Direct Line both offer dividend yields of between 6% and 9%.
A portfolio of these high-yield stocks could generate a significant level of income on a savings pot of £150,000.
That’s the strategy I plan to use to make a passive income stream with an investment of just £10 a day. By following a set investment plan, I reckon it’ll be relatively straightforward to hit my passive income target.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.