Let’s say an investor wanted to start from nothing – no savings or anything at all – and build a £10,000 yearly income stream. A monthly £833 could be a sweet addition to the pension pot. It could simply free up a day at work or so. And, thanks to the somewhat unique nature of this country’s stock exchange, UK shares might be well-suited to help get there.
Let’s take a look at how it might happen, even by investing just £200 a month.
Global revenues
To start with, the term “UK shares” is something of a misnomer. Companies on the London Stock Exchange rarely manage operations 100% within our borders, and many of them are closer to the opposite.
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The FTSE 100 draws 80% of revenues from abroad. The FTSE 250, with its smaller, more domestic-focused firms, draws 50%. That’s a good thing for a would-be passive income seeker as it means the growth isn’t chained to what’s going on in this country.
The FTSE 100, by the way, is on course to post its third-best month in a decade, only being surpassed by bouncebacks after Covid and Liz Truss. Why? Because a strong dollar has boosted income earned abroad (among other reasons).
Another objection people have with UK shares is their recent underperformance. This is true for the FTSE 100, at least. Footsie shares have returned around 7% since the 1980s. That’s not so good compared to the 10% rule of thumb many aim for.
But it’s worth bearing in mind that the index is defensive. Its big banks and miners and the like do better in choppier economic conditions and global stocks have been on a bull run of late. That can mean a lot of safety if the economic outlook gets gloomier
One FTSE 100 stock of this nature is Diageo (LSE: DGE). Although it may seem counterintuitive, alcohol is firmly a defensive stock. When the budgets are tight, the beers and wine are rarely first on the chopping block.
Irish tipple
It’s a true global company, too. Diageo owns a wide range of household names like Smirnoff, Tanqueray, and Johnnie Walker that are sold on every continent.
The jewel in its crown is surely Guinness and a testament to the company’s brand strategy. With newspaper articles saying the stout is Gen Z’s favourite drink, and it having to be rationed in London pubs, well, that’s the kind of long-lasting appeal that can make a terrific investment.
Risks exist, such as declining consumption among younger people. But overall, I think it’s one to consider. And full disclaimer, I own a position in the company myself.
So how does an investor get to that £833 a month target? Well, the £200 monthly outlay will need time to build.
As time goes on, the money would hopefully grow and grow as dividends roll in and share prices increase. I don’t think a 9% long-term target is unreasonable from quality stocks like Diageo.
If withdrawing at a 4% rate, then a £250k portfolio is required. On the above terms, that would be passed in the 27th year.
The number can be tweaked to bring that rate up or down but either way, I’d say it’s a plan worth considering.
