I think generating passive income is a great way for investors to build up a pot of cash with very little effort.
I’m keen to start investing now so that I’ll have more freedom when I’m older. And while it may seem unattainable to some (it’s not!), I plan to use my passive income streams to fund my lifestyle.
With that in mind, here’s the plan and methods I intend to use.
Target high-quality stocks
To help me achieve my goals, I must target high-quality stocks that not only provide a dividend yield but also potential for growth in the future. Therefore, I’m turning my attention to the FTSE 100.
The index is home to plenty of blue-chip stocks that I see helping me build my pot in the years ahead. And with an average yield of around 3.5%, this trumps that of its American neighbour the S&P 500.
Consistency is key
Another method I’d use would be to remain consistent. Unexpected costs can easily derail plans. But by sacrificing a small portion of my income, for example £100 a month, over a 30-year span my pot should grow significantly.
£100 a month is equivalent to £1,200 a year. With an annual average return of 6% (the average FTSE 100 annual return since its inception), after five years I’d have earned around £1,000 in interest, with the size of my pot sitting at £7,000.
However, after 30 years, I’d have made nearly £65,000 from my investments! This is due to the power of compounding. And chances are I’d have increased my contributions annually too.
What I’d buy
So, what companies should I buy that will help me reach my aim?
Well, one that stands out to me is Legal & General (LSE: LGEN).
The main attraction of the stock is its yield. As I write, it offers investors a return of 9%, placing it comfortably amongst the Footsie’s highest payers.
What’s more, the firm has also done a lot of work in recent times to increase value for shareholders, including its cumulative dividend plan. With it set to end next year, from this plan, the business has already generated over £3.5bn in dividends. As an investor looking for stable payments in the years ahead, schemes like this are music to my ears.
I also think the Legal & General share price has the ability to provide some handsome returns over the long run. While it’s down just 3% in the last 12 months, it’s fallen by 12% in the last five years. As a result, I sense value.
With its brand recognition and diversification, I see a strong business.
Volatility in the financial sector has impacted its performance given its ties to global markets. The stock nosedived nearly 10% following the collapse of Silicon Valley Bank. Inflation has also adversely affected its assets under management, while CEO Sir Nigel Wilson stepping down at the end of this year may cause further uncertainty.
Despite this, I’m still a fan.
The plan
Of course, returns can vary and a 6% annual average return isn’t guaranteed (I might make less, or more).
Yet as I stride to achieve such results and look to select quality companies with growth potential that I can hold for decades, it’s stocks like Legal & General that I’ll be targeting.
