The idea of making a passive income by investing the cost of daily cup of coffee may sound far-fetched. After all, the cost of the beverage is around £2.50.
This equates to £75 per month, or £900 per year. Even if an individual stopped buying one cup of coffee a day over their working lifetime of around 45 years and instead saved the money, they’d still end up with only £40,500. That’s unlikely to be sufficient to provide a worthwhile income.
Investing money in UK shares to make a passive income
The past performance of UK shares show they’re a sound means of generating a passive income in the long run. For example, the FTSE 100 and FTSE 250 have produced annual total returns of around 8% over the past two decades.
Assuming the same return on the earlier example of £75 per month invested in stocks, this would produce a portfolio valued at around £400,000.
From this, a 4% annual withdrawal would amount to £16,000. This is significantly higher than the current State Pension. And it suggests the stock market is a worthwhile means of building a portfolio that goes on to provide a passive income in older age.
Income opportunities in the stock market
Of course, many UK shares offer a higher passive income than 4% today. The stock market crash has caused many FTSE 100 and FTSE 250 shares to offer high dividend yields.
As such, they may provide a more generous income return. They may also have the scope to deliver strong capital gains in a stock market recovery.
Since the UK stock market has always bounced back from its past declines, investing in a diverse range of shares today could lead to a surprisingly large portfolio and income in the long run.
For example, shares such as Aviva, Sainsbury’s, Barratt and GSK have been negatively impacted by the economic downturn this year. As such, they trade on low valuations at the present time. And that may undervalue their capital appreciation potential over the coming years.
They may also have greater financial resilience than investors are currently pricing in to cope with a challenging economic environment.
Investing for the long term
With regular investment services available, buying UK shares on a regular basis to make a passive income is open to nearly all investors. With the stock market priced at an attractive level today, now could be the right time to start planning for the future.
For the cost of a cup of coffee a day, the potential for FTSE 100 and FTSE 250 shares to improve an investor’s retirement prospects seems to be a price worth paying.
Peter Stephens owns shares of Aviva, Barratt Developments, and GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline. 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.