I believe investing in stocks and shares is one of the best ways to generate passive income for life.
There are other strategies I can use to create passive income, such as buy-to-let. However, I am not particularly comfortable using these strategies because I have never used them before. I do not want to dive into something I do not understand.
Doing so could incur significant losses, which may be difficult for me to recover from.
Another benefit of using stocks and shares to generate passive income is that it only requires a small amount of money to buy equities. Indeed, I can start building a passive income portfolio with a little as £30 a week.
This strategy will not make me a millionaire overnight, but it could put the foundations of a solid income portfolio in place. I can then build on this portfolio in the years ahead to increase my wealth and financial nest egg.
Passive income portfolio
An investment of £30 a week works out at around £1,560 a year. If I can keep this up for 10 years, I could put away £15,600, assuming the value of my portfolio does not change in the meantime.
Of course, the goal of investing in stocks and shares is to increase my wealth in the long run. I estimate that if the value of my portfolio grows at 10% per annum over a decade, I can build a nest egg worth approximately £27,000.
There is no guarantee I will earn a 10% per annum return on my money. This is just a ballpark estimate. Nevertheless, I think it illustrates my passive income strategy relatively well.
I plan to save a modest weekly sum with a growth objective for the first 10 years. When I have reached a set figure, I can then switch from investing in growth stocks to investing in income stocks. For example, according to my research, there are a handful of stocks on the market right now that currently support dividend yields of 7% or more.
If I were to invest my portfolio of £27,000 in a selection of stocks yielding 7%, I would be able to earn a passive income of £1,900 a year.
I should clarify that dividend investing does not provide a guaranteed passive income. Dividend income is paid out of group profits. Therefore, if company profits suddenly collapse, it is likely the dividend will be eliminated.
This is something I will have to keep in mind as we advance.
Foundations for the future
The great thing about this strategy is that it is pretty flexible. Investing in growth stocks and then switching from growth to income is possible with any amount of money. If I wanted to put away £100 a week, I would be able to achieve a much larger financial nest egg.
My calculations show that it would be possible to build a portfolio worth around £90,000 by saving £100 a week over a space of 10 years, assuming an annual rate of return of 10%. By switching from growth to income, I estimate I would be able to generate a passive income of around £6,300 a year on this portfolio.
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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.
