Earning a chunky passive income’s a popular financial goal. After all, who doesn’t love the idea of making money without having to lift a finger?
The trouble is that most paths to making money while sleeping require a lot of effort. Buying a rental property comes with a lot of hands-on management. And starting a side hustle’s exceptionally time-consuming.
Yet investing in quality dividend stocks doesn’t suffer from these drawbacks. And best of all, it doesn’t actually take that much capital to get started. In fact, £50 a week, or £7.14 a day, is more than enough to get the ball rolling.
Unlocking a £30,000 hands-free income
Making money through dividends is pretty straightforward. Investors buy some shares in a dividend-paying enterprise, hold them for the long run, and enjoy watching the money roll in each quarter, depending on the company.
So how much money can £50 a week earn me? In the early days, not much. On average UK shares typically offer around 4% in terms of dividend yield. That means for each £50 invested, a grand total of £2 can be expected each year in passive income.
However, suppose investors decide to reinvest dividends in the short term, and the markets continue to deliver their historical 4% capital gains as well?
| Years | Portfolio Value | Passive income (4%) |
| 1 | £2,704.28 | £108.17 |
| 5 | £15,960.07 | £638.40 |
| 10 | £39,738.10 | £1,589.52 |
| 20 | £127,942.40 | £5,117.70 |
| 40 | £758,289.37 | £30,331.58 |
Going bigger!
The prospect of earning up to 30 grand each year is undoubtedly enticing. And it paves the way to a more comfortable retirement. But what if I don’t want to wait around for 40 years to hit this goal?
Well, barring investing more money each month, investors can switch strategies from index investing to stock picking. By being more selective and taking control of portfolio management, investors can strive to earn market-beating returns. That’s precisely what Warren Buffett did, and he’s now one of the richest men alive today.
Earning Buffett-like returns isn’t easy. But it’s also unnecessary. Even if a portfolio only eeks out an extra 2% in annualised returns, that’s enough to wipe out six years from the waiting time. And for those with the patience to wait the full four decades, their passive income could reach as high as £55,000.
A top stock to buy now?
Picking stocks is far easier said than done and, in many cases, naïve investors tend to flock to the flavour of the month. However, this approach can be dangerous without proper due diligence.
According to Hargreaves Lansdown, one of the most bought UK shares right now is BP (LSE:BP.). The oil & gas energy giant does pay a tasty 5.8% dividend yield. And with the global oversupply of fossil fuels, the share price has also taken a bit of a tumble, potentially creating a buying opportunity.
In fact, even institutional analysts have started taking notice, with Citigroup predicting good times ahead.
Unfortunately, commodity prices are notoriously fickle. And even Citigroup’s admitted oversupply could remain a challenge in 2025, despite efforts from OPEC+ to defend oil prices. In other words, BP shares may tumble even further.
But the thinking is that with the Chinese government stimulating its economy, demand for fuel will rise alongside industrial production so it could go either way.
This post was originally published on Motley Fool
