Can you put a price on a cup of coffee? I mean, sure, you walk into a Starbucks and will be given a price. It’s a big outlay nowadays too. A cappuccino can set me back five pounds and change. But that price tag could turn into something very different if I invest it, where small sums can turn into big sums and handsome passive income, given enough time and know-how.
My Foolish colleague Royston Wild showed as much in this article. He took a £5.40 saving and showed how it might reach £2.4m over a reasonable timeframe. And while I don’t have a daily coffee habit to slash out of my budget, it did get me wondering where else I might be able to carve out little pockets of savings.
Give it up?
For my own situation, I’d like to think of the matter in the amount of passive income I receive. In particular, I’m interested in what it would take to start receiving the amount to buy a coffee every day. In short, how can I build a passive income stream of £5.40 a day from giving up the cups of coffee?
Let’s start at the end. If I target a 5% dividend yield from a smattering of high-quality income stocks, I’d need £39,420. That’s a lot of coffee or coffee equivalents. But by rerouting my Costa fund and putting it to good work in the stock market, I could get that back in just over a decade. Skip the coffee now, in 11 years (roughly) get £5.40 a day from investments. Not bad.
My calculation is based on a 9% total return from whatever I invest in. Getting this key part of the equation right or wrong can result in my income being substantially higher, or lower.
Yellow stickers
One stock I hold and I’m bullish on beating that figure in coming years is Tesco (LSE: TSCO). The stock’s up 31% in the last year and pays a tasty 3.41% dividend.
It’s a defensive stock too. It could perform well even with a spot of economic malaise. Sales in food and essentials (including a certain caffeinated product) are the last things to stop getting bought.
The company is a clear leader with nearly double the market share of its closest competitor. That offers efficiencies through economies of scale – a huge boon in a cut-throat sector. Its customers seem to agree too. At least Its Clubcard is incredibly popular with over 20m members coming back for yellow stickered discounts.
On risks, a hefty employer’s NI bill has just been handed to it. A price-to-earnings ratio of less than 20 is hardly the cheapest either. Overall though, I see the stock as reasonable value. I think this is one for investors to consider in pursuit of a passive income. I reckon I’ll pop over there to pick up some instant coffee now too.
The post Here’s how saving £5.40 a day could net me £1,971 yearly passive income for life appeared first on The Motley Fool UK.
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John Fieldsend has positions in Tesco Plc. The Motley Fool UK has recommended Tesco 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.
