Generating annual passive income of £100k isn’t going to happen overnight for most investors. But by leveraging the power of compounding returns, it’s possible to build such a sum over time, even when starting out with just a grand.
Here, I’ll explore a strategy that can be used by investors to build the foundations for a sizeable passive income portfolio.
Four basic phases
The typical arc of an investor’s journey (say, 25 to 50 years) goes something like this:
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- Growth phase: Focus on higher-risk investments to build wealth. This will be mainly quality growth shares, with perhaps a handful of high-risk, high-reward moonshots.
- Balanced: Diversify with a mix of growth, blue-chip stocks, and dividend shares. Moderate risk as wealth preservation becomes more of a focus.
- Income phase: Shift more to income stocks, bonds, and conservative investments. Dividends are never guaranteed, so diversification would still be necessary to reduce risk.
- Retirement: Prioritise fixed-income investments and capital preservation. Minimise risk to ensure reliable cash flow for living expenses.
For an investor starting off then, it’ll probably be about building up a portfolio with growth-focused investments.
Brand power
One growth stock an investor with £1,000 might consider today is Uber Technologies (NYSE: UBER). There are five key reasons why, in my opinion.
First off, the share price has fallen from $86 to $60 since mid-October. Therefore, investors can pick up shares of the ride-hailing giant for 30% cheaper than before.
Second, this means the valuation is more attractive. Right now, Uber stock is trading on a forward price-to-earnings (P/E) multiple of 23.7. That’s about average for the S&P 500 right now (24). Yet Uber isn’t what I’d call average!
Third, Uber shares aren’t currently much higher than the $45 they went public at back in 2019. Yet in that time, it’s gone from a business losing more than $4bn a year to one that’s set to generate free cash flow of $7.7bn in 2025.
Next, Uber has an incredible brand. Like Google, it’s become synonymous with what it does. In other words, it’s a byword for taxi, which means it has mindshare with consumers and is well-trusted. I believe this gives it a durable competitive advantage.
Lastly, the company still appears to have plenty of growth opportunities left in the tank. These include a high-margin advertising business, its Amazon Prime-like Uber One subscription programme, bookings for train tickets, and more.
Uber One now has over 25m members, and new subscribers are spending four times more than non-members when signed up. Sticky platforms like this usually prove to be winning investments in the long run (for proof, look at the likes of Netflix and Booking Holdings).
There are risks, of course, including regulatory ones involving the classification of its drivers. Also, robotaxis could pose a threat one day, though I personally suspect Uber’s platform (with 161m monthly active customers) will be the central marketplace for robotaxi bookings.
A roadmap to income of £100k
An 8%-10% return is the historical market average. Investing £700 a month on top of the £1,000 starting amount at a 10% return can build a £1.7m portfolio in just under 32 years (but isn’t guaranteed, of course).
Then it’s simply a case of switching strategies from growth to dividends. A portfolio this size yielding 6% would generate a £100,000 second income.
