I believe investing in stocks and shares is one of the most straightforward ways to generate a passive income for life. Indeed, I think I can start generating income with a weekly investment of just £10.
It might take a few years and a little patience, but I believe the strategy outlined below can help me generate a monthly income from equities.
Passive income strategy
An investment of £10 a week, or £520 a year, might not seem like a lot at first. But small regular investments can really add up over the long term.
Rather than investing this money in income stocks, to begin with I would acquire growth investments. The aim of this strategy is to increase my wealth as fast as possible.
Over the past decade, the MSCI World Index has produced an average annualised return for investors of 12.5%.
Unfortunately, there is no guarantee the market will continue to produce a double-digit return every year. Past performance should never be used as a guide to future potential and I could even lose money.
Nevertheless, I think these figures illustrate the wealth-creating potential of equities in the long run.
Using this number as a rough guide to potential returns, my figures show that by investing £10 a week into an MSCI World Index tracker, I can build a £10,000 nest egg within 10 years. Over the space of two decades, I estimate I could build a £50,000 investment pot.
By increasing my weekly contributions to £40, my figures show I could build a nest egg worth nearly £200k after two decades of saving.
I believe this would be enough to generate a regular, hands-free passive income from stocks and shares.
From growth to income
When I have hit this target, I plan to switch from growth to income investing. If I can buy a portfolio of stocks yielding 7%, I estimate I could earn an annual income of £14,000.
A couple of stocks on the market offer this kind of income potential. Companies like Persimmon, which currently offers a dividend of nearly 9%, at the time of writing.
The one drawback of this approach is the fact that as dividend income is paid out of firm profits, it is not guaranteed. If company profits suddenly decline, shareholder dividends are usually the first to feel the pain. I will be keeping this in mind as I plan my strategy.
Despite this drawback, I think the approach outlined above can help me meet my passive income target. If I can earn £14k a year in income, I can either reinvest the money to grow my wealth or use it to supplement my income.
Either way, I believe the strategy can help me generate a passive income for life. Even though it does have drawbacks, compared to other passive income strategies, I think this approach is the best for me in the long run.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
