What if I had no cash saved, and I wanted to build a passive income to help in my retirement? No chance, right?
Wrong!
I say it’s never too late to start investing for the future, though I might change my plans if I thought I had less than 10 years left.
Less than that, and I think the risk of a Stocks and Shares ISA might be a bit too much. Oh, yes, UK shares in an ISA, that’s my plan.
How easy is it?
It can be surprising just how much we could accumulate using a straightforward strategy.
So, my steps are… open an ISA and transfer in as much as I can each month. Then, when I have enough, buy some shares. Easy, right?
Well, not so fast. How much is enough? With today’s low charges, a minimum of £500 is enough for me. But £1,000 is better.
Then which stocks to buy? I go for FTSE 100 stocks that pay good dividends, with a track record of generating profits to support them.
Long-term target
I then buy more shares with my dividends each year, and let the miracle of compounding do its thing.
How big a pot might I be able to build? Just as an illustrration, let’s pick one stock. I’ll go for NatWest Group (LSE: NWG), which I rate as one of my top long-term income stocks right now.
With the NatWest share price in a bit of a slump, the forecast dividend yield is up at 7.4%. Forecasts show it above 8.5% by 2025, but I’ll stick with 7.4% here.
What if I could put away, say, £100 per month. Putting it all into NatWest shares, I could end up with a pot of more than £53,000 in 20 years.
The more we invest…
That assumes the NatWest share price and dividend will stay the same, and I doubt that. In fact, I think both will probably rise in the next 20 years, so my return could be a fair bit better than that. They could fall, though.
But I’m not forecasting anything here, this is just a ‘What if?’ thing. And we can’t control what our companies will do.
One thing we can control is how much we invest. So what would it take to reach my goal of £10,000 per year in passive income?
If I could stretch to setting aside £255 per month to buy shares, I could build up over £136,000 in 20 years. And at the same 7.4% dividend yield, that could pay me my ten grand each year.
Real-life strategy
Would I really put all my money into one stock? Well, no, that would be way too risky. We’ve seen what can happen to banks, and it isn’t at all nice. I want diversification.
But if I buy a different dividend stock each time, I think I could do pretty well.
Whether I’d reach more, or less, than £10k per year, I can’t say. Each stock I buy will have its own risks, which I need to think about.
But the thought of aiming for a five-figure annual income starting with nothing today? Well, it inspires me to try hard.
The post Starting with nothing, here’s how I’d aim for a £10k annual passive income appeared first on The Motley Fool UK.
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Alan Oscroft 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.
