How to invest £250 a month to target a £33,900 passive income for life

Investing a modest amount of money each month in carefully selected stocks can establish an impressive five-figure passive income stream. Here’s how.

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 couple showing relief at news

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.

Building an attractive source of passive income in the stock market doesn’t necessarily require a lot of starting capital. A fairly substantial portfolio is needed to generate meaningful dividends to cover living expenses. However, investors can leverage the power of compounding to build one over time through consistent buy-and-hold investing.

In fact, sparing as little as £250 a month to bolster a portfolio is sufficient to establish a lucrative income stream. Here’s how.

Buy-and-hold vs trading

As exciting as it may sound to buy and sell shares in rapid succession for short-term gains, trading is a complicated game that even professionals struggle with. After all, trying to predict which way stocks will move in the short term has very little to do with fundamentals. Instead, it’s mainly about human psychology – an irrational and largely unpredictable factor.

Should you invest £1,000 in Bank of Georgia right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Bank of Georgia made the list?

See the 6 stocks

However, while mood and momentum dictate the direction of stock prices in the short term, the quality and performance of underlying businesses determine what happens in the long run. Buy-and-hold investing seeks to capitalise on this, paving the way to a sustainable passive income.

By drip-feeding money into high-quality enterprises over time, the impact of temporary downturns can be mitigated thanks to pound cost averaging. Meanwhile, even if the share price suffers, dividends will likely keep flowing if cash flows remain intact. And these can be automatically reinvested at lower prices to amplify the effects of compounding even further.

Building a passive income with £250

The UK stock market has historically offered an average dividend yield of around 4% when looking at the FTSE 100 index. But by being more selective and picking individual stocks, boosting this yield to 5% or even 6% is firmly within the realm of possibility without taking on excessive additional risk.

This additional 2% may not seem like much. But in the long run, it can profoundly impact future passive income generation. Even if an investor can only replicate the average single-digit capital gains of the British stock market, the added yield is sufficient to boost the total return to around 10% annually. Drip-feeding £250 a month over a period of 30 years at this rate of return will lead to an investment portfolio worth £565,121.

At this stage, an investor can decide to start reaping the rewards. By taking the dividends as cash rather than reinvesting them, a 6% yielding portfolio would generate a passive income of £33,907 a year. And by using a Stocks and Shares ISA, this income would be 100% tax-free!

The bottom line

Unfortunately, nothing in the world of investing is without risk. As 2022 perfectly demonstrated, the stock market can be volatile. Corrections and even crashes occasionally throw a spanner in the works. And three decades is more than enough time for multiple periods of volatility to emerge.

Depending on the timing of these events, the expected passive income stream could be significantly less than expected. Not to mention, some top-notch businesses today may not stay that way in the future, potentially compromising dividend income.

Nevertheless, prudent investing and staying vigilant can partially offset these risks. And given the potential rewards, it’s a pursuit worth taking, in my opinion.

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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.

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

Google office headquarters
Investing Articles

$1bn a day! This S&P 500 share still looks like a stock market bargain after Q1 earnings

The owner of Google and YouTube just announced strong results to the stock market, including another massive $70bn share buyback.

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

3 cheap FTSE 100 stocks with big dividends to consider buying right now

Sector weakness in some FTSE 100 industries has also left some of my long-term favourite stocks offering attractive dividend yields.

Read more »

Growth Shares

Forecast: £1,000 invested in Rolls-Royce shares could be worth this much by next year

Jon Smith talks through both his opinion and analysts’ forecasts when trying to predict where Rolls-Royce shares could head from…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

£5,000 invested in Lloyds shares 5 years ago is now worth…

The price of Lloyds shares has more than doubled over the past five years. However, our writer’s cautious about the…

Read more »

Investing Articles

Up 58% in a year, the BT share price could be the FTSE 100 target to beat in 2025

The BT share price has been steadily climbing back since newish boss Allison Kirkby came on board. Is the new…

Read more »

Businessman hand stacking money coins with virtual percentage icons
Investing Articles

£10,000 invested in Nvidia stock 5 years ago is now worth…

Even after the Nvidia stock falls of the past couple of months, its five-year performance remains stunning. And it could…

Read more »

artificial intelligence investing algorithms
Investing Articles

I asked ChatGPT for the best UK stocks to buy for my portfolio in the market sell-off. Here’s what it said

When Edward Sheldon asked the generative AI app for the best stocks to buy amid the market pullback, he was…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Could now be a rewarding moment to buy shares?

Christopher Ruane's looking for shares to buy in a turbulent market. But while he's focused on quality, he's equally interested…

Read more »