Unlike Warren Buffett, I don’t intend to work full-time well into my old age. My intention is to live on the passive income generated by my investment portfolio.
My long-term plan to get there is intentionally simple. Like clockwork, I invest every month in the shares of great businesses that pay me dividends either twice of four times a year.
When these cash payments arrive in my ISA, I don’t spend them. Instead, I automatically reinvest them to buy even more shares. This way the snowball gets ever larger over time as compounding works its magic.
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Here, I’ll explain how I’d invest in shares to aim for £35,464 in annual passive income. This rather random-sounding figure is currently the average salary for full-time workers in the UK, according to Forbes.
Investing in FTSE 100 shares
I’m pretty agnostic when it comes to investing. My portfolio contains UK and US high-growth shares, Dividend Aristocrats, exchange-traded funds (ETFs), investment trusts, and penny stocks.
If I think US tech stocks are looking cheap (like I did early in 2023), then I’ll focus there. If and when I think they stop looking good value (like in recent months), I’ll move onto another part of the market. But I very rarely sell.
Right now, I fail to see better value anywhere else than in cheap FTSE 100 shares carrying ultra-high-yields.
Last month, I added to my holdings in commodities giant Glencore and Legal & General. I also invested in Lloyds Banking Group for the first time. All three stocks are yielding between 6% and 9%.
Yet all are also tied to the economic cycle in one way or another. This means their fortunes often rise and fall with the overall health of the global economy (or the UK’s, in the case of Lloyds).
This could result in their share prices coming under further pressure if economic conditions were to worsen, which could still happen (hence their cheapness). But I like to buy when stocks dip and I see incredible value on offer with these stocks at present.
The power of regular investing
Now, let’s assume I’m starting from scratch at the age of 35 and I commit to investing £500 a month. If my portfolio matches the FTSE 100’s average long-term total return of 8% a year, then I’d end up with £704,621 at the age of 65. I’m excluding any trading and platform fees I may incur here.
Obviously, we’re all too aware that inflation will mean that this huge sum won’t be worth as much in real terms as it is today. But it should still generate a pretty decent return.
Indeed, if it was yielding just over 5%, my portfolio would be generating around £35,464 in annual passive income. And I’d still have my nest egg intact for emergencies or to leave to my family.
Of course, these figures are for the purposes of illustration. I might generate less than 8%, or it could be more. Individual dividends are never guaranteed. But the earlier I start investing, the better chance I’m giving myself of retiring comfortably. This is why I invest in stocks every month.
