I firmly believe that investing in stocks and shares is a straightforward way of generating a passive income for life. And I believe it is possible to generate a regular income with an investment starting from as little as £5 a day.
Passive income strategy
The strategy I plan to use to invest £5 a day is relatively straightforward. Today, there are plenty of online stock brokers offering investors the option to make regular investments without having to pay hefty fees.
This is a fantastic development for investors like myself who want to invest a small weekly figure.
There are two parts to my income strategy. The first part involves investment funds. Rather than picking a whole portfolio of individual stocks and shares, I would start building my passive income portfolio with a selection of income funds.
A great place to start is the City of London Investment Trust. This company has paid and increased its dividend every year for the past 55 years. It owns a portfolio of high-quality UK dividend stocks, which allows me to build exposure to these corporations at the click of a button.
The downside of using this approach is the fact that I cannot choose investments myself. There is also a management fee I will have to pay. This fee could eat into my returns over the long term. I may also end up owning part of a company I do not necessarily want to hold in my portfolio.
Despite these challenges, I would be happy to buy the stock today.
Income and growth
As well as acquiring an income investment fund, I would also buy a basket of income stocks for my passive income portfolio.
Some of the companies I would like to include in my portfolio, which have pretty defensive qualities, are BT and Severn Trent. Both offer, or are projected to offer, dividend yields of more than 4%. They also have relatively predictive income streams from their defensive operations. This means the dividends are relatively secure and may have room to grow over the following years.
Of course, there is no guarantee these dividends are secure. If there is a sudden economic slump, BT and Severn Trent might have to reduce their distributions to investors. This is something I will keep in mind as we advance. As the geopolitical situation around the world deteriorates, the chances of an economic slump are increasing.
The bottom line
This is the strategy I would use to invest £5 a day to generate a passive income for life. The companies and fund outlined above could produce a 5% annual return on my money.
According to my estimate, assuming I can put away £5 a day for 30 years, this return could produce an annual passive income of around £5,000, presuming there are no dividend cuts in the meantime.
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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.
