I’m targeting £15,000 a year in passive income from my portfolio of stocks and shares. I believe investing in stocks and shares is one of the easiest ways to generate a passive income stream.
Not only can an investor get started from as little as £25 a month, but it’s also relatively straightforward to build a well-diversified portfolio.
For example, if I were to invest £25 a month in the FTSE 100, I’d have exposure to 100 of the largest companies in the world, in industries ranging from oil to technology and everything in between.
It would be virtually impossible to have the same level of diversification without millions of pounds upfront investment from other passive income streams, such as buy-to-let.
Building a passive income portfolio
I should start by saying that generating a passive income of £15,000 a year won’t be straightforward. For a start, I’ll need to build a large pot from which to generate income.
I’m targeting an annual yield on my investments of around 4%. This suggests I’ll need to build an income portfolio of around £380,000.
To reach this level, I’m investing in a simple FTSE All-Share tracker fund. The FTSE All-Share has produced an average annual return of around 7% historically. As such, my figures show I’ll need an investment of £1,000 a month for 17 years to hit this target.
Of course, this is making quite a few assumptions. First is that the market will continue to rise at 7% per annum. Second, that I’ll be able to put away £1,000 a month for 17 years. I may not hit this target. The past performance of the market should also never be used to guide future potential.
Therefore, these targets may not be suitable for all investors. However, it’s something I’m comfortable aiming for.
Dividend stocks
When I’ve hit my income target, or if I decide to shift my portfolio away from capital growth towards passive income sooner, I’ll target the market’s best income stocks. While I noted above I’d be targeting a portfolio yield of 4%, that doesn’t mean I only have to buy stocks with a 4% yield.
I plan to buy a blend of equities, mixing companies like Diageo with British American Tobacco. These equities support dividend yields of around 2% and 8% respectively. I think these consumer goods champions could be the perfect investments for an income portfolio. I also like utility stocks such as National Grid and United Utilities. These offer dividend yields of 5% and 4% respectively.
Unfortunately, there’s no guarantee these stocks will offer the same income level when I’ve built my passive income portfolio to size. After all, dividends are paid out of company profits, which can both fall and rise over time.
However, they’re good examples of the kinds of income investments I’d like to buy.