In order to generate a sizeable amount of money from the stock market, some assume that a complicated strategy is needed. In reality, sticking to a simple idea can do just as well. In my opinion, the hunt for passive income that I can enjoy later in life warrants time spent finding a good strategy. Here’s how I’m going about it, without the faff or jargon.
Picking a few good stocks
I completely understand the argument of investing in a lot of different stocks in order to diversify myself. Yet research has shown that beyond a certain point, the benefit of adding more and more stocks reduces. For example, am I that much better off with 1,000 stocks versus 999? I don’t think so.
Therefore, I’d aim to own a dozen stocks for this area of my income portfolio. From this, I can have a broad exposure to different sectors, different-sized companies and also different risk levels. I can take a decision to own a high-dividend-yield share with a 10%+ offering, by offsetting some of the risk with a 4% dividend stalwart.
Granted, there’s the inevitable risk that further down the line one company might stop paying a dividend. But again, with a dozen stocks this impact will be limited. I can adjust and find a new stock, accordingly.
Building a five-figure passive income
I want to aim to earn £50k in total passive income from my portfolio. In order to speed up the process, I’m going to reinvest any dividends I receive to begin with. This helps me to benefit from compounding.
For example, I could have £1,000 invested in a stock yielding 8%. I can use the annual £80 I receive to buy more of the stock. The following year (assuming no changes), my £1,080 will earn me £86.40. By repeating this over several years, my portfolio builds quickly.
If I invest £500 a month in dividend stocks with an average dividend yield of 6%, I’ll have made over £50k in passive income by year 15. At this point, I can look to sell some of my portfolio to enjoy the funds. Or I can leave it invested but spend the future annual income proceeds (£8,800) as it comes through.
Of course, I have to accept that such an outcome isn’t guaranteed, unlike a savings account that offers a fixed interest rate. I know that the value of my investments could fall as well as rise, but I believe the potential reward is worth the risk.
The current average FTSE 100 dividend yield is 3.7%. This is lower than the average yield I’ve assumed for my portfolio. Instead of owning every stock in the index, I’m only aiming to pick a dozen. This allows me to be active and select above-average companies. For example, I’d include the likes of Legal & General and British American Tobacco. Both shares currently have a yield in excess of 6%.
The bottom line is that with regular investment into a small group of sustainable dividend ideas, I can meet my goal over time.
The post How I’d target £50k in passive income from just a dozen stocks appeared first on The Motley Fool UK.
6 shares that we think could be the biggest winners of the stock market crash
The hotshot analysts at The Motley Fool UK’s flagship share-tipping service Share Advisor have just unveiled what they think could be the six best buys for investors right now.
And while timing isn’t everything, the average return of their previous stock picks shows that it could pay to get in early on their best ideas – particularly in this current climate!
What’s more, all six ‘Best Buys Now’ are available to access right now, in just a few clicks.
Learn more
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
I’m following this Warren Buffett technique to create generational wealth
Will the Thungela Resources share price keep rising in December?
Where next for Scottish Mortgage shares in 2023 and beyond?
2 cheap income stocks I’d buy this December!
Best British small-cap stocks to buy for December
Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco. 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.