I was reading The Motley Fool’s personal finance site this week and came across an article on the UK’s average salary. It got me thinking: how much could I save based on the average salary? I wouldn’t want to just save though. I’d want to start building passive income with my salary. To do this, I’d want to explore where I could invest to create a diversified portfolio.
I then used a salary calculator to determine a reasonable weekly investment amount for myself. Based on the average UK salary of £25,971, I’d be left with a net £410 per week. Taking into account my other bills and expenses, I think I could save and invest £50 out of the £410 each week. This represents about 12% of the net average salary.
Now that I’ve calculated how much I could save, here’s how I’d start building my passive income stream.
Finding the right share-dealing account
The first thing I’d do before choosing my investments is find the right dealing account. There are many to choose from. I need to consider the fees I have to pay for the account, and any dealing costs. Ease of use and investment selection are also very important. The Motley Fool compares some online brokers here, and provides a star rating on them too.
I chose Interactive Investor for my share-dealing account. One of the key reasons was its free regular investing feature. I can invest as little as £25 per month, up to a total of 25 monthly investments through direct debit. This means I only need to consider the monthly account fee, and not any extra dealing costs with my £50 per week.
Dividend stocks
My preferred method of investing to build passive income is buying dividend stocks. I’d be a part owner of a business, and would get a cut of the profits as a shareholder.
The UK market is a great place to find dividend-paying companies with high yields, in my view. The large-cap FTSE 100 index has a forward yield of 4%, which is a respectable dividend income.
I can aim higher if I buy individual stocks. This is riskier though, as many things can go wrong with a business. Dividends may get cut, and then I’d lose my passive income stream.
Nevertheless, I’d set up a weekly £50 investment on my dealing platform to buy dividend stocks. Companies such as Legal & General, Aviva and Rio Tinto offer much higher yields than the FTSE 100 right now. I could switch which stock I bought every few months to make sure my portfolio became diversified.
Investment funds for passive income
One final way I’d consider building passive income is with investment funds. I could start with the iShares Core FTSE 100 ETF, which is an index fund that tracks the FTSE 100. As mentioned, the 4% dividend yield is still highly respectable, and I’d be diversified across 100 stocks immediately.
Another fund I use is the iShares FTSE UK Dividend Plus ETF. This has a 12-month trailing yield of 5.7% as it aims to pick high-yielding stocks. There are currently 55 holdings, so I’d be diversified more than if I bought single stocks here too.