£10k in cash? Here’s how I’d aim to turn that into annual passive income of £27,000

Our writer explains how he’d invest £10k into dividend shares via an ISA with the goal of building up a lucrative passive income stream.

| More on:

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.

Exterior of BT Group head office - One Braham, London

Image source: BT Group plc

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.

We’re well into the new tax year which means a fresh start for a Stocks and Shares ISA. Savvy investors should be considering how to make use of this £20k a year tax-free investment limit to create a passive income stream for the future.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

If I had £10k in spare cash lying around, here’s how I’d invest it for a comfortable second income when I retire.

Should you invest £1,000 in Boohoo Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Boohoo Group made the list?

See the 6 stocks

Getting started

The first step would be to open a Stocks and Shares ISA, if I didn’t already have one. With that done, I could pick any assets to invest in, from commodities and shares to exchange-traded funds (ETFs).

Right now, the FTSE 100 is near the highest level it’s ever been but many profitable opportunities still exist. I find high-yield dividend shares offer the best chance to achieve the solid, consistent returns I’m looking for.

A high-yield gem

With a 7.4% yield, BT Group (LSE:BT.) is one example of a FTSE 100 dividend share I’d select. As the UK’s leading telecommunications network, I believe it’s likely to remain profitable for the foreseeable future.

Admittedly, recent price performance hasn’t been impressive. The stock has struggled to regain the highs it made during the smartphone boom between 2009 and 2015. However, it’s currently building infrastructure that could be its next profitable venture – a fully digital telecommunications network in the UK. The project has cost a lot, but if implemented successfully should lead to improved results.

Created with Highcharts 11.4.3Bt Group Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

The high level of spending is reflected in future cash flow estimates. Although the share price is stagnant, BT has been raking in cash. Using a discounted cash flow model, analysts estimate the shares to be undervalued by 77.5%. This could lead to some decent price growth when excess spending decreases.

However, the digital rollout isn’t finished and has already hit some snags, so BT could still be in for a rocky year. I believe the company’s decades of experience will help drive success, but a project of this scale is no quick win. 

Mixing it up with regular investment

Barring a gap during the pandemic, BT has been paying dividends consistently for over a decade and I would expect it to continue doing so. An investment of £10k into the stock would pay around £720 a year in dividends. After 10 years, by compounding gains using a dividend reinvestment program (DRIP), the annual dividend income could rise to almost £1,500. But even after 30 years, dividends would still only be around £7,000 a year.

However, if I build a diversified portfolio of shares with dividend stocks and growth stocks I can maximise my returns. A realistic goal would be a portfolio with an average 6% yield and 5% annual share price growth. This isn’t guaranteed and could face ups and downs along the way, but it’s a fair example.

After 30 years, this portfolio could net me £13,100 in dividend income. But if I contribute a mere £100 a month on top of the initial £10k, it could grow to almost £483,000 in 30 years, paying annual dividends to the tune of £27,000.

Should you buy Boohoo Group now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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.

Mark Hartley has positions in Bt Group Plc. 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.

More on Investing Articles

Close-up of British bank notes
Investing Articles

£20,000 in savings? Here’s how it could be used to target a £913 second income each month

Christopher Ruane walks through some practicalities of how an idle £20k could be the foundation for a sizeable long-term second…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

5 steps to building monthly passive income with a spare £10k

Christopher explains how an investor could aim to use some spare cash to start building regular passive income streams through…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Tesla’s struggling. Could NIO stock benefit?

NIO stock has moved up very slightly this year, while Tesla has crashed. Our writer considers whether it might be…

Read more »

Two employees sat at desk welcoming customer to a Tesla car showroom
Investing Articles

Could Tesla stock be a brilliant bargain in plain sight?

Christopher Ruane sees some things to like about Tesla, but as its vehicle revenues have gone into sharp decline, is…

Read more »

British coins and bank notes scattered on a surface
Investing Articles

3 cheap FTSE 250 stocks with big dividends to consider buying right now

The FTSE 250's loaded with so many big dividend yields it's hard to know where to start. These three have…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

Up 585%, could Rolls-Royce shares still go higher?

Christopher Ruane likes the Rolls-Royce business but is not so convinced by the value its current share price offers him.…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

I reckon a bull market’s coming! Here’s what I’m buying for my Stocks and Shares ISA

Hoping to capitalise on what he believes is an undervalued UK stock market, our writer’s added more of this FTSE…

Read more »

piggy bank, searching with binoculars
Investing Articles

The UK stock market looks undervalued to me. Here’s 1 growth stock to consider for a SIPP

Our writer explains why he thinks the UK stock market’s currently in bargain territory, and identifies one share potentially worthy…

Read more »