Many investors dream of being able to generate a passive income stream from stocks. I think it’s relatively straightforward to hit this goal. All you need is a disciplined savings plan and income investment strategy.
Today, I’m going to explain the approach I’m using to generate a passive income with an investment of just £25 a week.
Passive income stream
Unfortunately, passive income streams don’t just materialise overnight. It takes years of saving and disciplined investing to build this resource. However, the benefits of having this income stream often far outweigh the issues investors may face at the beginning.
The first stage of creating a passive income stream is to lay out how much you can afford to save every month. For this article, I’m targeting a weekly contribution of £25. That works out at £1,300 per annum.
This may not seem like much at first, but the small contribution could grow into a large financial nest egg in the long run. And that’s thanks to the power of compound interest.
For example, over the past three-and-a-half decades, the FTSE 250 has produced an average annual return for investors of 12%. At this rate, a regular investment of £25 a week, or £108 a month, could grow to be worth £25,000 after a decade, according to my figures.
Searching for income
With a savings pot of £25,000, it could be possible to generate a yearly passive income stream of around £1,000. There are several ways investors can hit this target.
Buying a basket of high-quality blue-chip stocks is one option. Companies such as BAE Systems and Vodafone support dividend yields of around 5%. This would produce an annual passive income stream of £1,250 from a lump sum investment of £25,000.
The one drawback of buying a basket of high-quality blue-chip stocks is the extra work required. Investors need to be sure the companies they are acquiring can sustain their dividend payouts.
Over the past nine months, the vast majority of former income champions have cut their dividends to preserve cash in the coronavirus crisis. Avoiding businesses that decide to cut their distributions is paramount if you want to build a sustainable passive income stream.
Another option is to buy a high-yield stock fund. The best option for investors choosing this route may be to buy the BMY Mellon Equity Income Booster Fund.
This fund offers one of the highest dividend yields of all stocks on the market today. It currently supports a dividend yield of 8.6%. It’s able to achieve this level of income by owning high dividend stocks and using derivatives to boost income.
An investment of £25,000 in this fund would generate an annual passive income of £2,150.
I think the best option may be to use a combination of funds and blue-chip stocks. This would give investors the best of both worlds. A steady income stream, as well as the potential for capital gains as companies’ earnings grow.