£9,000 in savings? Here’s how I’d aim to turn that into £400 of monthly passive income

There are plenty of ways to earn a passive income, but few are as tried and tested as investing in stocks and shares. Dr James Fox explains.

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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.

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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.

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Investing in stocks and shares is one of the most effective ways for me to generate passive income. By purchasing shares in companies, I can benefit from capital appreciation and dividends over time.

This strategy allows my money to work for me, providing a steady income stream without active involvement. With careful research and a diversified portfolio, investing in the stock market can be a rewarding path to financial freedom and long-term wealth accumulation.

What’s more, when I invest through a Stocks and Shares ISA — available through all major brokerages — all my earnings will be tax-free.

So how would I turn some savings, say £9,000, into a passive income that could truly change my life? Let’s take a look.

Compounding’s king

When it comes to building my portfolio for passive income, Compounding’s definitely king. Starting with £9,000, I have a solid foundation to harness the power of compound growth. By reinvesting dividends and capital gains, my initial investment can snowball over time, potentially growing exponentially.

To maximise compounding, I should:

  1. Diversify my investments
  2. Reinvest all returns automatically — growth-oriented companies typically reinvest earnings anyway
  3. Make regular additional contributions to increase the pace of growth
  4. Maintain a long-term perspective

Time’s my greatest ally in this process. The longer my money compounds, the more dramatic the results can be. For example, assuming an average annual return of 7%, my £9,000 could grow to over £35,000 in 20 years without any additional contributions.

However, if I make sensible investment decisions, my portfolio can growth much faster than that. For context, my daughter’s portfolio grew 35% in her first year. It’s going well in year two as well. Good investors can easily average double-digit returns.

So if I were to average 10% annualised growth, after 20 years my £9,000 would be worth £65,000. That’s without any additional contributions. And with £65,000, well, I could generate around £400 a month by invest in high-dividend yielding stocks.

But where to invest today?

At the time of writing, the Nasdaq is near an all-time high, US mega-cap stocks are trading at high multiples, the market’s digesting Labour’s first Budget, and the US election’s next week. This doesn’t make stock picking easy.

One interesting option to consider could be Greencoat UK Wind (LSE:UWK). This renewables fund currently trades at a 15.9% discount to its net asset value (NAV) — the value of its assets according to auditors — and offers investors a 7.5% dividend yield.

Greencoat UK Wind’s unique dividend growth policy, linked to RPI, is an attractive proposition. However, with RPI falling to 2.7%, the 2025 dividend increase is expected to be significantly lower than this year’s 14.2% rise. 

It’s also worth noting that the company’s performance is inherently dependent on the weather. Regardless of what management does, if the wind doesn’t blow, the fund will experience a bad quarter.

Nonetheless, I feel that’s baked into the prices we pay for wind-focused investments. It’s a sector benefitting from government backing and renewed investment under Labour. The lifting of a de-facto ban on onshore wind farms should be a long-term boost.

All-in-all, I’d back this firm to deliver double-digit returns over the long run. That’s the 7.5% dividend yield — which will rise relative to our buying price today — and share price appreciation of at least 2.5% annually.

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.

James Fox has no position in any of the shares mentioned. The Motley Fool UK has recommended Greencoat Uk Wind Plc. 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.

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