I firmly believe that one of the best ways to build a passive income stream is to buy stocks and shares.
The great thing about this strategy is that one does not have to be a millionaire to follow it. Anyone can start investing in the stock market. Most online retail brokerages now allow customers to open an account with only £100 or less. What’s more, it is possible to set up a regular investment plan from as little as £25 a month, which could be perfect for building a passive income.
Pound cost averaging
A great wealth-building strategy for the long term is to use pound cost averaging. This is something I make use of in my pension portfolio. Rather than investing lump sums, I invest a figure every month into a portfolio of investment funds.
This strategy means I buy more fund units when the market falls, and less when it rises. Studies have shown that pound cost averaging increases investment returns over the long term. It doesn’t require any specialist knowledge or extra time to follow. All I have to do is set up a regular investment plan, a direct debit, and the market takes care of the rest.
I use this strategy to invest for my pension. But nothing is stopping me using it to build a passive income. It’s the strategy I would use to invest £100 a month to earn income from stocks and shares.
Passive income portfolio
In my opinion, one of the best ways investors can get the most bang for their buck in the market is to use a low-cost passive tracker fund. There are hundreds of these investments to choose from. I think one of the best options for income investors is the Vanguard UK Equity Income Fund. It charges just 0.14% per year and tracks the UK Equity Income index. It offers a dividend yield of 4.2% at the time of writing.
I have owned this fund for income in the past. I found it a great way to generate a passive income from some of the UK’s top income stocks. The minimum investment is £100 a month.
This isn’t the only option. There’s a range of other investment trusts and funds investors can use to build an income stream. One that I like is the City of London investment trust. This currently supports a dividend yield of around 5% and has consistently increased its payout for over four decades. This track record gives it a special place in the realm of income investments, I feel.
That’s the strategy I would use to invest £100 a month to earn a passive income stream. Once the investment strategy is all set up and running, it can take care of itself. So I can let the income grow year after year for the rest of my life.
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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.