Adding a tenner into the stock market each day doesn’t seem particularly noteworthy. But it could actually be the foundations for a mighty passive income structure.
Take Warren Buffett as proof. The ‘Oracle of Omaha’ began investing when he was 10 years old. He was a millionaire by the time he was 30. Today, his net worth is estimated to be worth over $100bn.
But here’s the thing. Buffett made 99.7% of that money after his 52nd birthday. And he’s accumulated over 90% of his wealth since he turned 65. That’s the miracle of compound interest. It’s like a snowball rolling down a hill, getting larger and faster as time goes on.
As Warren Buffett once admitted himself, “My life has been a product of compound interest”.
Getting started
You don’t have to had started investing in stocks at 10 years old (though it certainly helps!). Anyone can start investing today and get the snowball rolling. Investing £10 a day works out at £70 a week, or £304 a month.
But firstly, why invest in stocks? Well, they have a higher long-term return than either bonds or cash. The S&P 500 index has delivered an impressive compound annual growth rate of 10.7% over the past 30 years.
The FTSE 100 has delivered an average total return of 7% a year over the long term. Sure, that’s not as impressive as the S&P 500’s return. But the FTSE 100 generally has more cyclical stocks versus the S&P 500’s “riskier” growth stocks.
And this year, stocks like BP and Glencore have helped the UK index comfortably outperform its US counterpart. Yet the beauty of being an investor is that I don’t have to choose between these indexes. I can diversify and invest in both!
Passive income
As my returns start snowballing, so does the potential amount of passive income I could enjoy. Let’s assume I achieve an annual return of 8.85% (the returns of the FTSE 100 and S&P 500 averaged out) on my £10 a day.
YEAR
AMOUNT (£304 x 12 months)
ACCRUED INTEREST
TOTAL
1
£3,650
£151
£3,799
5
£3,650
£4,598
£22,838
10
£3,650
£21,852
£58,332
15
£3,650
£58,770
£113,490
20
£3,650
£126, 251
£199,211
25
£3,650
£241,227
£332,427
30
£3,650
£430,013
£539,453
35
£3,650
£733,506
£861,186
The FTSE 100 currently has an average forward yield of 3.79%. (That’s double the S&P 500’s, by the way.) But it’s possible to be selective and construct a high-yield portfolio that pays more than this average.
Doing so could increase my portfolio yield to between 5% and 6%. So as my money grows, so does the amount of passive income I could potentially earn were I to switch into a high-yield income portfolio.
YEAR
AMOUNT
ANNUAL PASSIVE INCOME (5.5%)
10
£58,332
£3,208
20
£199,211
£10,956
30
£539,453
£29,669
35
£861,186
£47,365
Amazingly, investing £10 a day could one day lead to annual passive income of £47,365.
Of course, this is for illustrative purposes, using averages to show what’s possible. No stock investment is risk-free, and dividends can be cut as well as increase. Returns could be less than the average, or more.
But the ingredients to building wealth stay the same – dedication, consistency, and patience. These are the hallmarks of long-term investing.
The post How I’d use £10 a day to build snowballing passive income from stocks appeared first on The Motley Fool UK.
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Ben McPoland 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.