I’m always looking for ways to make my money work harder for me. As such, I want to turn some of my investments into reliable passive income streams.
But is it possible to invest a relatively modest amount like £150 a month to achieve an £10,000 annual income?
Yes, I believe it is. Albeit, there are some factors to consider.
Planting the seeds for passive income
Time is one of the biggest components of the equation. The longer I can invest for, the larger my pot can become. If I wanted to reach my goal within just a few years, I’d consider that to be an unrealistic target. However, if I extend my time horizon across 25 years, the picture changes dramatically.
Consider that over the long run, the FTSE 100 has achieved around an 8% annual return. Although future performance isn’t guaranteed, I’m going to assume that is roughly what I could gain over many years.
By my calculation, if I were to invest £150 a month for 25 years in FTSE shares, I could build a pot worth over £130,000. Not bad for a relatively modest monthly saving.
Which FTSE shares?
So which FTSE shares should I buy to get there? I’d consider buying a diversified selection of the best stocks the FTSE 100 has to offer.
As a long-term investor, I don’t want to be constantly changing my stock holdings. That’s why I’d want to own companies that are likely to thrive for many years.
I’d look for strong brands, competitive advantages, and household names. Profitable companies with double-digit margins, strong cashflow, and solid balance sheets are preferred.
Shares tend to flow in cycles of bull and bear markets. These swings often accompany business cycles and can go through periods of boom and bust. That’s why I’d want to own a variety of shares across groups that include cyclicals, defensives, quality, growth, and value names.
Right now, I’d happily buy Rio Tinto, Howden Joinery, Persimmon, Diageo, and BP. I reckon overall they fulfil many of the qualities outlined above.
Best passive income shares
Next, let’s consider what happens after 25 years, if I manage to successfully build the £130,000 investment pot. At that point, my plan would be to receive passive income. That’s why I’d focus on owning a basket of the best dividend shares I can find.
The stocks I buy for passive income in the future will likely be different to ones that I might buy today. But the concept will remain the same.
I’d look for dividend shares that offer above-average yields. In addition, I’d want to see signs of affordability too. By looking at its dividend cover, I can see how well they are covered by earnings.
Again, I’d invest in a variety of industries to avoid putting all my eggs in one basket.
Today, some of the best dividend shares I can find include Rio Tinto, Phoenix Group, Imperial Brands, Legal & General, and Vodafone. On average they currently offer an 8% yield. That’s more than enough to earn passive income of more than £10,000 a year.