Passive income is the end goal for many investors. However, getting to the point at which we can earn passive income from our investments can prove more challenging. For example, if I were to have £15,000 in cash, I’d have to accept that I wouldn’t be able to generate life-changing passive income any time soon.
Instead, it takes time. It also requires us to make wise and growth-oriented investment decisions. And eventually, we’ll reach a position where we can move towards a dividend-focused portfolio and earn a passive income.
Picking winners
If I had invested exclusively in a FTSE 100 tracker over the past decade, I would have seen my portfolio grow by around 5.4% annually. That’s not groundbreaking. This pace of growth would transform £15,000 into £25,700 over the 10 year period.
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However, a carefully researched portfolio can perform much better. For example, Scottish Mortgage Investment Trust has delivered 308% growth over the past decade. The trust is famed for successfully picking the next big winners.
But while I do invest in Scottish Mortgage, I prefer to hand pick most of my investments, selecting stocks based on their quantitive strengths and momentum. Basically I’m looking for stocks with attractive price-to-earnings-to-growth (PEG) ratios, strong profit margins, a recent history of beating earnings expectations, and share price momentum.
This strategy has led me to companies like AppLovin — I’m up more than 600% here in one year — Celestica, Nvidia, Rolls-Royce, and Sterling Infrastructure. And this is how we can deliver a market-beating portfolio and get our investments moving in the right direction. These are all stocks I continue to hold.
So, instead of earning 5.4% a year, I can earn a lot more by following a simple stock-picking formula. In fact, looking at my daughter’s junior ISA — which is just around a year old — this strategy has delivered 67.4% growth on invested assets.
At even half this pace of growth, I could turn £15,000 into £200,000 in less than a decade, in turn allowing me to generate a life-changing sum — around £16,000 a year — in passive income.
One to watch
One stock that meets lots of my criteria right now is United Airlines (NASDAQ:UAL). The stock is up 133% over the past 12 months and still trades at an attractive 8.7 times forward earnings — representing a 60% discount to the industrials sector.
Moving forward, the company is expected to deliver modest earnings growth at 7.5% annually throughout the medium term. This could be aided by the Trump presidency with proposed lower corporate taxes and a promise to keep oil prices down — fuel typically represents 25% of operational costs.
The airline also recently delivered a normalised earnings beat and analysts have broadly improved their expectations for the current quarter.
While Trump’s presidency could see the opening up of Russian airspace in the event of a ceasefire in Ukraine, the President-elect’s domestic policies are largely considered to be inflationary. As such, I do have some concern that more inflation will slow down interest rate cuts, and in turn this will mean less discretionary income for holidays and flying etc.
It’s not a stock I’m diving into, but it’s one that meets the criteria and resembles my aforementioned big winners. For now at least, I’ll be keeping a close eye on it.
