£20,000 savings? Here’s how I’d aim to retire with a passive income of £50k a year

A large investment in high-yielding stocks, coupled with contributions and reinvestment, can lead to significant passive income in the long term.

| 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.

Image source: Getty Images

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.

While there are many avenues for passive income, dividend stocks offer a relatively straightforward approach. With a decent initial contribution and the power of compounding returns, an investment can grow significantly over time.

I plan to retire comfortably and I won’t be able to do that with my savings alone. I need to make that money work for me — or I’ll work until I die! Fortunately, there are systems in place to help me achieve this.

For example, a Stocks and Shares ISA allows me to invest up to £20k a year tax-free. A variety of assets can be placed in the ISA but I think dividend stocks are the best option. The regular payouts they provide mean my savings build up even when I can’t afford to contribute.

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.

But achieving £50,000 in passive income still requires some work on my part. An initial £20,000 investment goes a long way to kickstarting my income strategy. But I’ll have to keep adding some money each month to accelerate the outcome. 

I’ll also have to pick my shares wisely. Aside from high-yield shares, defensive shares help to keep things steady during volatile economic periods. Some examples are Unilever, GSK and BAE Systems.

A solid dividend stock

Dividend-wise, I’d consider a reliable real estate investment trust (REIT) like Primary Health Properties (LSE: PHP). Not only does it have a 7% yield, it’s increased dividends almost every year since 2000.

Growth has been weak recently due to high interest rates and a contracted economy. But with rates already dropping, things are looking up. The stock grew 10% in the past six months. Long term, it’s up 75% in the past 20 years — an annualised return of only 3% a year. For a dividend-focused trust, that’s about average.

With the economic outlook improving, I’ve become more enthusiastic about REITs lately. But the housing market’s volatile and an economic slump could send prices crashing again. The new Labour government’s policies on housing and healthcare are promising but remain to be seen in action.

There are many other REITs worth considering but from my research, PHP looks like one of the best right now. However, to reduce my exposure to company-specific risks, I’d include other dividend stocks in my ISA. For example, City of London Investment Trust‘s up 125% in 20 years but with a lower yield of only 4.8%.

I think it’s good to aim for a mix of growth and income. I’d aim to achieve an average 6% yield and 5% annual return.

The road to £50k

With the above averages, a £20,000 investment could grow to £165,250 in 20 years, with dividends reinvested. That would only pay out £9,120 a year in dividends. But if I contributed an extra £200 a month to the ISA, it could grow to £321,700, paying £17,634 in dividends. 

If I kept contributing and compounding the returns for another 10 years, it could grow to over £965,000, paying annual dividends above £53,000. 

That’s not bad for a total investment of only £92,000 over 30 years. Of course, this is just a rough estimation — who knows what could happen in 30 years? It could end up being far less… or far more!

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 BAE Systems, City Of London Investment Trust Plc, GSK, Primary Health Properties Plc, and Unilever. The Motley Fool UK has recommended BAE Systems, GSK, Primary Health Properties Plc, and Unilever. 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

Investing Articles

Nvidia share price dips despite strong Q3 results. What can we expect now?

Despite posting strong Q3 results after yesterday's market close, the Nvidia share price slipped 2.5% in aftermarket trading. Mark Hartley…

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

An outstanding interim report sends the Halma share price surging 10%

News of 13% revenue growth and a 17% increase in earnings per share has the Halma share price rising. And…

Read more »

Investing Articles

With 2025 on the horizon, what’s the dividend forecast for Rolls-Royce shares?

As 2024 rolls to an end, our writer considers the forecast for Rolls-Royce shares after the company reinstated dividends earlier…

Read more »

Investing Articles

Where might the Rolls-Royce share price be in 12 months? Here’s what the experts say

The Rolls-Royce share price has more than doubled since November 2023. But analysts have a wide range of opinions as…

Read more »

Long-term vs short-term investing concept on a staircase
Investing Articles

As Shell’s share price continues to drift lower despite strong Q3 results, should I buy more?

Shell’s share price is down 14% from its one-year traded high, despite strong recent results, leaving the shares looking undervalued…

Read more »

Investing Articles

Here are 2 of my favourite cheap shares to buy today

Harvey Jones is on the hunt for cheap shares and was surprised to discover these two big-name FTSE 100 stocks…

Read more »

Investing Articles

Where could the BT share price go in the next 12 months? Check out the latest forecasts

The BT share price has had a bumpy ride but has nevertheless attracted the attention of two famous billionaire investors.…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

This FTSE 250 share has surged 20% in a month. Its P/E is still just 3.3. So should I buy?

Our writer thinks this FTSE 250 stock remains enticing, with an ultra-low P/E ratio and an attractive yield. But why's…

Read more »