How I’d build a passive income with £200 a month

This Fool lays out the approach he would use to generate a passive income stream with an investment of just £200 a month.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

My strategy for building a passive income stream from stocks and shares is relatively straightforward. According to my calculations, by investing a small monthly lump sum of £200, I can build a substantial nest egg over the next few decades. And I can start drawing income from this pot whenever I need to. 

Building a nest egg

To build a financial nest egg, I am concentrating on high growth stocks. An investment of £200 a month is not enough to generate a passive income immediately. That is why I am focusing on growth equities. Using this approach, I can grow my monthly investment substantially over the next decade or so, which should open the door to a higher level of passive income in the future. 

Of course, this strategy may not be suitable for all investors. By investing in growth stocks, I can increase my chances of building a sizable financial nest egg, but it also increases the risk of losses. A meaningful loss could have a significant impact on my passive income ambitions. 

Still, it is a strategy I am comfortable with, and to help reduce the risk, I would buy investment trusts and funds that focus on growth stocks. 

Some examples of investment trusts that I think are attractive growth investments are the Mercantile Investment Trust and the JP Morgan Global Growth & Income Trust. Both of these investments companies focus on finding undervalued growth securities in both the UK and international markets. They also currently offer attractive dividend yields of around 3%. 

The one downside of using this approach is the fact that these firms charge management fees, which could impact my returns. I also have no choice over the investments picked for their portfolios. 

Over the past 10 years, these trusts have yielded an average annual total return for investors of 15%. Past performance should never be used to guide future potential, but I think these numbers provide some illustration of the sort of returns I could achieve by investing in growth stocks. 

Passive income potential 

Using a rough growth estimate of 12% per annum for the next 20 years, I calculate my £200 monthly investment could grow to be worth £200k within two decades. If I then switched from growth to income, targeting a 5% dividend yield on my investments, I think I could achieve an annual passive income of £10k or £830 a month.

It may even be possible to earn a higher monthly income by targeting higher yield investments. Indeed, some stocks in the FTSE 100, such as Phoenix Group, currently offer yields of more than 6%. A 6% return would suggest a passive income of £12k or £1k a month on a £200k investment pot. 

This strategy is not perfect, and there is no guarantee it will yield an annual income of £10k after 20 years. There is also no guarantee the process will produce a £200k pot.

However, I think it has the potential to help me build a large financial nest egg and income stream over the next few decades. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns shares in the Mercantile Investment Trust and the JP Morgan Global Growth & Income Trust. 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.

More on Investing Articles

Investing Articles

How cheap is the 72p Vodafone share price?

The Vodafone share price looks very cheap having fallen to a 72p price tag. But is it really the bargain…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Up 43% in a year and the IAG share price could keep on rising!

One of the FTSE 100’s highest-flying stocks still looks cheap on an earnings basis. Is this a brilliant buy for…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

As the BT share price slumps on H1 results, should I buy for big dividends?

Just when I thought the BT Group share price could be set for a new bullish run, the telecoms giant…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

After H1 earnings, is the Wizz Air share price set for a comeback?

With passenger numbers starting to improve, could the airline’s latest trading update mark the start of a turnaround for the…

Read more »

Happy parents playing with little kids riding in box
Investing Articles

Here’s a simple 5-stock FTSE 100 income portfolio with an 8.1% yield

Considering and investment of £20k in these five FTSE 100 dividend stocks could potentially generate just over £1,600 in annual…

Read more »

Fireworks display in the shape of willow at Newcastle, Co. Down , Northern Ireland at Halloween.
Investing Articles

Will the BP share price go gangbusters under President Trump?

The BP share price has had a rough ride lately and Harvey Jones says the FTSE 100 oil giant looks…

Read more »

Satellite on planet background
Investing Articles

Is this the best bargain in the FTSE 250 right now?

This FTSE 250 defence stock is a world leader in testing and evaluation technology for military use and has seen…

Read more »

Fireworks display in the shape of willow at Newcastle, Co. Down , Northern Ireland at Halloween.
Investing Articles

How would I start planning my Stocks and Shares ISA for 2025? With this super-solid growth stock

I can’t think of a better way to prepare for a new year than opening a fresh Stock and Shares…

Read more »