There are few better ways to earn a passive income than investing in stocks and shares. That’s my opinion anyway. We select our stocks and wait for the dividends to come in.
The only issue is, we need capital to generate a passive income. If I had £20,000, the most I could realistically earn in one year is £1,600, assuming I could actualise an 8% yield across a handful of dividend-paying stocks.
Addressing the problem
Essentially, if we don’t have enough capital to earn the passive income we’re aiming for, we’ve got to build our portfolios. That means reinvesting and continually contributing in order to foster more growth.
When a portfolio is growing at 10% annually, and the returns are being reinvested, it would take seven years to double its size. In other words, my £20,000 would become £40,158.
But if I’m making monthly contributions from my salary, or via some other source, I can make it grow much faster. So if I were to contribute £200 a month, I’d see my portfolio cross the £40,000 mark in just four years.
And in turn, with this rate of growth, it would take me 18.5 years before I had enough capital to generate £20,000 a year as a passive income — that’s assuming an 8% yield is still achievable.
Sensible stock picking
The second issue is that many novice investors don’t make the right investing decisions. And that can cause us to lose money. It’s worth worth remembering that if we lose 50%, we’ve got to gain 100% to get back to where we were.
Of course, it’s not easy to make the right investment decisions. But thankfully, there’s a wealth of resources online to help us make the sensible choices. Whether that’s learning which indicators suggest a stock is undervalued, or getting the latest news on stocks and shares.
Meta
I believe Meta (NASDAQ:META) could be one such sensible pick to help grow a portfolio. The stock has performed extraordinary well over the past 12 months, surging 163%. One of the reasons for this is the demand for big tech companies known as the ‘Magnificent Seven’ — all of which are profit-making companies at the pinnacle of the tech world.
However, there’s certainly been some concern that these seven companies are overbought. And I’d agree that some of them are.
But I believe Meta still has further to rise. The Zuckerberg company is forecasted to grow earnings at 19.9% over the next three-to-five years. This results in a price-to-earnings-to-growth ratio of 1.2, making it the cheapest of the Magnificent Seven bar Nvidia.
This growth is being delivered by constant improvements to its social media business and the optimisation of processing through the use of artificial intelligence (AI). The company is also much leaner than it used to be, with margins strengthening significantly over the past 12 months.
I do appreciate there’s a lot of competition in the social media space, and despite its dominant position, there are risks. But Meta has all the hallmarks of a company that’s going to continue winning, and one that could help my portfolio grow 10% annually.
The post £20k in savings? Here’s how I’d aim for £20k in passive income appeared first on The Motley Fool UK.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. James Fox has positions in Meta Platforms and Nvidia. The Motley Fool UK has recommended Meta Platforms and Nvidia. 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.
