There will come a time in my life when I think I would rather have safe, low-risk passive income than a lot of potentially volatile shares.
I’ll be looking for stable, well-diversified strategies to make sure I sleep well at night and can maintain my portfolio long term.
Why I think £650K is a good aim for me
To get reliable residual income, I first have to have a foundation. A nest egg of around £650K doesn’t seem too hard to achieve if I keep up my efforts for a few decades.
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First of all, starting with just £10K and assuming I’d earn the 10% market average annual return, I could end up with £650K if I invested just an extra £200 per month for 30 years. That’s due to the power of compound interest.
What’s great about this strategy to build a foundation is it’s easy and low-stress. It also only requires small investment contributions every month, meaning I can enjoy life and spend any other money I earn along the way to my goal.
Of course, there’s a risk that the market won’t perform as well as it did historically. So, I have to be prepared that my expectations might not be met.
Looking for bonds
Having an all-shares approach for 30 years might seem risky, but it is a plausible strategy. After all, that’s the way Warren Buffett has primarily invested.
However, a lower-risk strategy to get a stable return involve bonds. Government issues are particularly popular, especially in the US. However, good corporate debt can also be a viable option for me.
Of course, there’s always a risk of default, which is when an issuer can no longer make the interest payments or repay the principal amount. However, with high-rated bonds, this is very rare.
Additionally, if inflation rises, the interest payments from a bond yielding 5-6% may be offset. All it takes is inflation to be at or over those figures for the bond not to generate any real returns.
A set of dividend shares
After buying my bonds, I’ll look for some dividend shares to round out my portfolio.
I’ve found one company worth considering called Glencore (LSE:GLEN). It’s one of the world’s largest commodity traders. Particularly, it works in areas like the production of thermal coal, copper and zinc.
It has a nice 8.4% dividend yield, which is way higher than I’d be expecting from the other shares. My average to seek would be roughly 5-6%. The company also hasn’t reduced its dividend since 2021.
Additionally, at a price-to-earnings ratio of around 7, I think it’s unlikely the shares will lose value if I were to buy them now.
However, it currently only has 7% of its debt ready to be paid off in cash. This is a considerable risk for me to consider.
Furthermore, its dividend yield hasn’t reliably been 8%. Management has raised and lowered it over time, so it would probably average to my 5-6% expectation.
£30K a year
So, I think my plan is good. If I had a nice set of bonds and dividend shares averaging 5.5% each, my £650K a year invested could yield £35,750.
That’s the equivalent of around £17K today if adjusted for inflation, certainly helping to top up a state pension.
