How I’d invest in FTSE 100 stocks to aim for £50k a year in passive income

Our writer shares what their chosen strategy would be to aim for £50k a year in passive income by investing in FTSE 100 stocks.

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.

Close-up of British bank notes

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.

Investing in UK income shares is a tried and tested method for building a handsome second income.

The good news for me is that the FTSE 100 is home to several companies boasting juicy dividend yields. What’s more, some are even well covered by earnings at current levels.

As such, here’s how I’d invest in dividend shares to aim for £50,000 a year in passive income.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Building an £800,000 portfolio

Building an investment pot big enough to pay out £50,000 a year in passive income is no mean feat.

To achieve something like it I’ll need to build a portfolio worth around £800,000.

Why this much? Well, if I could achieve an average dividend yield of 6.5% on a portfolio of this size, I’d earn £52,000 a year in dividend income.

As someone with decades of working ahead, the positive news is that I’ve got plenty of time to implement a solid strategy that’ll help me reach this goal.

Since my main objective at this stage is to construct a portfolio large enough to enable me to earn a substantial passive income, I’d opt to invest in a diversified basket of growth and income stocks.

This way I can aim to benefit from a combination of share price growth and cash dividends.

Once I’ve bought the stocks for my portfolio, let’s say I invest £570 a month roughly spread across each of them.

Assuming I achieved an annualised return of 8%, I’d have an investment pot worth £802,873 after 30 years.

Playing the long-term game

This brings me nicely onto the importance of being in it for the long term.

If I’m unwilling to stick with it over the decades, it just won’t be possible for me reach my goal.

What’s more, having a long-term perspective will enable me to overcome the inevitable bouts of volatility that plague the stock market.

More importantly, it’ll also allow me to benefit from the miracle of compound returns. Seasoned investors like Warren Buffett know this is the real key to building substantial wealth.

Achieving a 6.5% average yield

Fast forward with me 30 years and let’s assume I managed to reach that £800,000 portfolio. Now I’d just need to earn an average yield of 6.5% from my holdings.

To illustrate, I could do this today by buying shares in companies such as Legal & General (8.3% yield), Glencore (8.1% yield), and Aviva (7.5% yield).

I’d particularly focus on these three since each one’s dividend is covered by earnings. Yields that are well covered by earnings today give management plenty of scope to increase shareholder payouts in future.

That said, I’m aware that no dividend is ever guaranteed. After all, it only takes a period of sustained unstable macroeconomic conditions for companies to begin reining in cash payouts.

As a result, I’d always plan ahead and be aware that my aim to achieve a 6.5% yield could be jeopardised in the short term.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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.

Matthew Dumigan has no position in any of the shares mentioned. 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.

Our best passive income stock ideas

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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 »

Diverse children studying outdoors
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 »

Finger clicking a button marked 'Buy' on a keyboard
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 »

Man thinking about 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 »