Passive income is very attainable. I think even with a small starting sum, a decent, growing passive income can be created. And over time it can snowball because of compounding – when dividends are reinvested to create more income year after year.
Investing a small sum in the UK stock market
One of the great things about investing in the UK stock market is there’s almost no amount too small to start with. Provided the money isn’t needed for living – as we should only really invest what we can afford to lose – then it’s possible to set aside any amount to buy shares with. This makes investing in shares much more accessible than other forms of investing.
What’s important though is to really learn about the market. This will help maximise the chances of success and avoid basic mistakes like over-trading or buying overly indebted companies.
Passive income tips
To really make the most of an amount like £100 per month I’d start by identifying which shares could be solid passive income payers. I’d want a yield that’s way above current bank interest rates and one that’s preferably been growing for the last five years. Examples of UK shares meeting these criteria are Rio Tinto, Redrow, Legal & General and Synthomer. All these shares also happen to have at least double-digit earnings per share growth, which is positive. They are also all very established and profitable.
The second tip for making the most passive income possible is to make sure the company is in an industry that can keep growing, or at least isn’t shrinking. So I’d avoid cinemas, for instance. Legal & General, to take one of the examples, has a good runway for growth because of an ageing population, creating demand for its retirement products.
My third consideration would be to make consistent contributions. If my chosen amount is £100, it should be that each and every month. Or if that’s not possible, at least as often as is feasible. Investing consistently and over a long period of time are two of the major factors affecting how big an investment pot will grow. Discipline is a vital ingredient in making investments of £100 per month turn into something that down the line can snowball into a much larger portfolio.
Potential income stream
So I’d identify top shares, make sure the industries my investments sit in don’t face major challenges and I’d be consistent.
To show what’s possible, here’s what could be created with just £100 per month, over the course of a working life of, say, 45 years. With just £100 per month, and starting with nothing, it could grow to £324,000 if a 7.5% return was achieved on average each year. If I then took out 4% a year, my passive income could be more than £1,000 a moth. And if I started with £10,000, the value of the total pot could jump up to £509,000.
Of course, I might not achieve that and have to accept that my capital is always at risk.
But I really do believe that with £100 per month it is possible to create a good passive income, with the caveat that the money needs to be invested consistently and well, and allowed to grow and snowball. That’s the beauty of compounding.
Andy Ross owns shares in Legal & General. The Motley Fool UK has recommended Redrow and Synthomer. 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.
