If I gave up coffee, here’s how much passive income I could earn next year

Our writer thinks he could generate hefty passive income by making one key lifestyle change and investing in high-yielding shares.

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.

Happy young female stock-picker in a cafe

Image source: Getty Images

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.

I like the idea of generating more passive income. To achieve this, I’ve started to review my spending habits to try and identify any unnecessary or discretionary expenditure.

Each weekday, I usually buy a large skinny latte from my local Starbucks for £3.25. This adds up to nearly £850 a year! If I gave up that coffee, and invested the money saved in UK shares, what level of dividend income could I generate next year?

I’m a cautious investor and will only look at the shares of companies listed in the FTSE 100. According to AJ Bell, these will pay out £81.5bn in dividends in 2022. This is an increase of £3bn on 2021, and will give a dividend yield for the index of 4.1%. But there are large variations between companies.

Builders

Some of the highest-yielding shares are currently in the construction sector. With the housing market starting to show signs of a slowdown, the share prices of Britain’s biggest builders have fallen recently. Assuming dividends remain at their current levels, Persimmon, Taylor Wimpey and Barratt Developments are presently yielding 18%, 10.2% and 9.8%, respectively.

Some experts are predicting a housing market crash. But the demand for housing remains high, and recent stamp duty cuts may help mitigate the anticipated downturn.

Smokers

Tobacco companies have historically been huge cash generators. This means they’re in a position to make generous returns to shareholders. British American Tobacco‘s shares are currently offering a return of 6.6% and those of its rival Imperial Brands are yielding 6.7%.

These two companies appear to be maintaining their profitability despite the economic slowdown.

Communications

In terms of passive income, two of the FTSE 100’s telecoms giants look attractive at the moment.

BT is currently offering a dividend yield of 6%. Patrick Drahi, the French billionaire, has been building a stake in the company. Drahi now owns 18% and the share price may jump if there’s any sign of him increasing his shareholding further.

Vodafone provides a return of 7.6%. The company has maintained its dividend for the past four years and there’s no reason to expect less this year.

Miners

Two mining companies are also presently showing healthy yields, although their dividends can fluctuate significantly as a result of changes in commodity prices.

Assuming Rio Tinto and Anglo American repeat their final dividends from last year, their shares are currently yielding 12.5% and 7.6%, respectively.

Caution!

When considering any investment strategy, it’s vital I remember that returns are never guaranteed. Past dividends aren’t necessarily a good guide to future shareholder payouts. Share prices are supposed to reflect future earnings. High yields are often a consequence of falling share prices with investors expecting such companies to reduce their dividends.

There’s also been an increasing trend in the FTSE 100 for companies to engage in share buybacks, as an alternative method of rewarding shareholders. This strategy can be preferred by management teams that are usually rewarded based on earnings per share.

Possible returns

Taking an average yield for the nine companies mentioned above of 9.4%, I could generate passive income of nearly £80 from my £850 of coffee savings in 2023. Even if the dividends are reduced, they could still be rewarding. So I’ll consider giving up my favourite drink as one of my New Year’s resolutions.

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.

James Beard has positions in Persimmon. The Motley Fool UK has recommended British American Tobacco, Imperial Brands, and Vodafone. 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

Bearded man writing on notepad in front of computer
Investing Articles

Could a 2025 penny share takeover boom herald big profits for investors?

When penny share owners get caught up in a takeover battle, what might happen? Christopher Ruane looks at some potential…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

3 value shares for investors to consider buying in 2025

Some value shares blew the roof off during 2024, so here are three promising candidates for investors to consider next…

Read more »

Investing Articles

Can this takeover news give Aviva shares the boost we’ve been waiting for?

Aviva shares barely move as news of the agreed takeover of Direct Line emerges. Shareholders might not see it as…

Read more »

Investing Articles

2 cheap FTSE 250 growth shares to consider in 2025!

These FTSE 250 shares have excellent long-term investment potential, says Royston Wild. Here's why he thinks they might also be…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Has the 2024 Scottish Mortgage share price rise gone under the radar?

The Scottish Mortgage share price rise has meant a good year for the trust so far, but not as good…

Read more »

Investing Articles

Will the easyJet share price hit £10 in 2025?

easyJet has been trading well with rising earnings, which reflects in the elevated share price, but there may be more…

Read more »

Investing Articles

2 FTSE shares I won’t touch with a bargepole in 2025

The FTSE 100 and the FTSE 250 have some quality stocks. But there are others that Stephen Wright thinks he…

Read more »

Dividend Shares

How investing £15 a day could yield £3.4k in annual passive income

Jon Smith flags up how by accumulating regular modest amounts and investing in dividend shares, an investor can build passive…

Read more »