“How can I build up any kind of passive income when I have no money saved?” I’ve heard that kind of question a few times.
But everyone I know who invests today started with little or nothing. And some are now raking in bags of cash. The most successful do it with a Stocks and Shares ISA.
But what about someone leaving it a bit late, who wants to build up an income pot as quickly as possible?
They’d have to take a bit more risk, for sure. But what would my approach be?
Cut spending?
I’d take a look at my monthly spending, and cut out everything that wasn’t an absolute necessity. Maybe even Greggs‘ steak bakes.
Running it through my head, I reckon I might come up with £250 a month that way.
And as it’s money I’d have been spending on stuff I didn’t really need, I could afford to take some risk, even the risk of losses.
Big returns?
Could I manage a total annual return of 10% from UK shares? I think I’d be in with a decent chance.
My top choice would be Phoenix Group Holdings (LSE: PHNX), with its fat forecast 10% dividend yield. And if I buy more shares with my dividend cash, it’s really quite amazing what compound returns could do to it.
In just 10 years, I could end up with more than £50k in my ISA. I’d have only put in £30k of my own money, and the other £20k would be from reinvested dividends.
Even more
But here’s where it gets crazy.
If I could keep going for 15 years instead of 10, what do you think would happen?
How does twice as much money, or a bit over £100k sound? That’s right, the extra five years could be worth as much as the first 10. And I could have my £10k per year passive income.
Oh, and of the £100k pot, 55% would have come from dividend cash. That’s more than all the money I’d put in myself.
I doubt many people would want all their cash in one stock. So how else might I generate 10% returns?
Total returns
I think British American Tobacco could do it. There’s a forecast 9.9% yield, and I think the shares are cheap. It’s at the mercy of whatever happens to tobacco consumption in the long term, so I’d need to be comfortable taking that risk.
There’s a handful of FTSE 100 stocks on yields of 8% or more, which would only need a couple of percent in share price rises to hit my target.
I’d definitely look into some of the FTSE 250‘s big yields too. And I haven’t even thought of small-cap growth stocks yet.
Risky
Phoenix Group itself has risks, with new regulations looming over the sector. And insurance can go from shiny one year, to dull just a few years later.
So I guess I might need to chop and change more often than ideal, with the extra costs that entails.
But if I really wanted to aim for that extra, higher-risk, income, I think the odds could be fair.
The post No savings in the bank? Here’s how I’d aim for £10k annual passive income as quick as I can appeared first on The Motley Fool UK.
Pound coins for sale — 31 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Greggs Plc. 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.
