Generating passive income is easy. Anyone with an interest-bearing savings account is already doing it. However, the challenge is scaling up this income stream to a meaningful monthly sum.
In my opinion, one of the best ways to achieve this is with income stocks from the UK’s flagship indices – the FTSE 100 and FTSE 250. Combined, they contain the 350 largest companies on the London Stock Exchange by market-cap.
Size can be a powerful advantage when it comes to sustaining dividend payments. And with a large collection of these businesses in a stable operational position, it doesn’t take long to spot high-yielding opportunities. In fact, the UK is home to some of the most generous dividend policies in the world.
With that in mind, let’s take a look at how putting aside just £3 a day is enough to eventually establish a steady and sizable stream of passive income.
Build capital regularly
Getting into the habit of putting aside £3 each day is easier said than done. Cravings for a morning coffee can easily lure investors off track. While it may not seem like a big deal to skip a day or two, in the long run, that can result in a lot of lost wealth.
Let me demonstrate. £3 compounded at the market average return of 8% is the equivalent of £109 over 45 years. Needless to say, that’s an expensive sandwich!
Of course, investors can’t just drip feed such small sums into income-generating investments. Buying and selling shares incurs fees. Thus, it’s typically prudent to let these daily savings accumulate within an interest-bearing savings account until a larger lump sum has formed.
After around every three months, roughly £270 will have been gathered. Then it’s time to kick-start a passive income portfolio.
Invest in the best
Waiting for three months of saving before being able to put money to work can be frustrating. After all, it’s only natural to start quickly and see the money roll.
But patience is a powerful skill in long-term investing. This is especially true during the times between each investment. This is the time that investors should be hunting down terrific businesses capable of delivering growing dividend payments for the next decade, or more.
Don’t forget dividends are funded by profits. And if the earnings of a company can’t grow or are shrinking, then shareholder payouts are likely to follow. Apart from seeing the passive income decline, announcements of dividend cuts or suspensions can send stock prices tumbling in a double whammy.
How much can investors make?
A well-built, intelligently-managed portfolio can achieve market-beating returns. However, for those who don’t have the time to hone this skill, index investing is still a perfectly viable approach to building wealth.
A portfolio matching the FTSE 100’s 8% return with £270 quarterly capital injections over 45 years can potentially be worth £471,558. And following the 4% rule, that’s an annual passive income of £18,862. But for stock pickers that manage just an extra 2% in annualised returns, these figures jump to £935,607 and £37,424 respectively.
Investors may end up with less depending on the timing of future crashes and corrections. But nevertheless, it goes to show how much wealth can be made by just putting aside £3 a day.
