I am looking to invest a lump sum of £75 a week to build a passive income stream for life. This might appear to be a small sum of money, but it could grow to become a substantial nest egg in the long term.
Investing for a passive income
The strategy I plan to use to invest for income is relatively simple. I am looking to buy high-quality income and growth stocks and hold them for the long run.
Using this approach, I will benefit from both capital growth and income growth. Overall, this should enable me to generate higher returns than I may otherwise be able to using a simple strategy based on buying income stocks.
Of course, there is no guarantee I will be able to build a passive income nest egg. Neither is there any guarantee that the income stocks I choose will continue to produce dividend income indefinitely.
As dividends are paid from company profits, if earnings fall, the corporations may have to cut their payments to investors. This could leave a big hole in my income strategy.
One approach I will be using to try and overcome this issue is diversification. By building a highly diversified portfolio of income and growth stocks, I believe I can reduce the risk that one dividend cut will have a significant impact on the overall performance of my nest egg.
Income and growth
Hikma and AstraZeneca are examples of companies I will be looking to buy. These pharmaceutical firms offer dividend yields of between 1% and 2%. More importantly, they have a long track record of dividend growth.
They are also both investing heavily in their futures and this should translate into earnings growth, allowing the companies to increase their dividends to investors. Earnings growth may also translate into capital gains. This will provide a double tailwind of both income and capital growth in my portfolio.
As a rough guide to the sort of profits I could earn using this strategy, I have estimated an annual growth rate of 10% on my money. At this rate, a weekly investment of £75, or £325 a month, could grow to be worth £66,000 within a decade.
If I then switched from income and growth to just income, I estimate I could earn an annual passive income of £5,300 on my money. This assumes I can acquire dividend stocks with a yield of 8%. Looking at what is available on the market right now, I believe this is possible, although it is not guaranteed.
This is the strategy I would use to invest £75 a week and earn a passive income. It is not a waterproof strategy, but as the example outlined above shows, it could be possible to build a passive income of £5,300 per annum using this method.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Hikma Pharmaceuticals. 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.
