I firmly believe that investing in stocks is one of the most uncomplicated and accessible ways to generate a passive income. Indeed, thanks to the rise of low-cost trading apps, anyone can start investing with just a few pounds every month.
I am planning to generate a passive income stream on an investment of just £200 a week.
Growth investing
This might not seem like a lot of money at first. After all, £200 a week is roughly £10,400 a year. Even if I could achieve a 10% dividend yield on this money, I would not be able to do much with a passive income of £1,040 per annum.
That is why I am going to use a growth investing approach to begin with. Rather than focusing on high-income stocks, I will focus on growth stocks for the first couple of years. I want to try and build a large lump sum. I can then invest this nest egg in income stocks. The aim is to generate an acceptable level of passive income every year.
Over the past few decades, the FTSE All-Share has produced an average annual return for investors of around 8%, including dividends.
While past performance should never be used as a guide to future potential, I will be using this figure as a rough guide to determine how much I can save over a decade.
Based on this performance target, and assuming a weekly investment of £200, I estimate I can build an investment pot worth around £160,000 within 10 years.
I believe this could be enough to generate a passive income of around £10k per annum. That is if I can achieve a dividend yield of at least 6% on my investments.
Based on the dividend yields available on the market at the moment, I believe this is possible.
Passive income investing
A couple of businesses on the market currently offer yields around this level. Corporations like Persimmon, which currently yields more than 8%. I would combine this high-yield stock with a company like Legal & General, which offers a yield of around 6%.
But dividend yields should never be taken for granted. They are paid out of company profits therefore, if earnings fall, management may have to slash the distribution.
As such, there will always be a risk of a dividend cut. That is why I want to own a handful of dividend stocks in my passive income portfolio. By using this approach, I hope I will be able to reduce the risk of a cut to my income generation.
While this approach will not produce a guaranteed level of income year after year due to the unpredictability of dividend payments, I am comfortable with the strategy laid out above. I plan to follow this approach to generate a passive income of around £10,000 a year… for life.
