I believe investing in stocks and shares is one of the easiest ways to create a passive income. With just £ 50 investment per week I will use the strategy to create a passive income.
Passive income strategy
To put it bluntly, I’m not saying I’ll be able to make instant passive income in just 50 a week. It will take time to build a pot large enough to generate a passive income.
For example, based on the results of an average dividend of about 3.8% in the market, I estimate that I need to make a pot of £ 100,000 to make a passive income of £ 3,800 a year.
To reach this goal, I will invest my money in dividend stocks. I think this will create a better cycle through which I will be able to reinvest the money earned from this investment and turbocharge the growth of my savings pot.
Some of my favorite passive income stocks on the market Phoenix Group, British American tobacco And Legal and general. At the time of writing, these firms support an average dividend yield of 6.6%.
Assuming these income levels remain stable and these companies do not increase capital, I estimate that it will take 207 years to invest £ 50 a week between them to create a passive income pot worth £ 107,000.
Of course, these are just guesses. I could have invested less during this period. A small change in how far I put it can have a significant impact on returns, such as a change in the way companies pay.
Increasing my deposit to just £ 60 a week will enable me to achieve the target in 18 years. On the other hand, if these companies reduced their dividends by 50%, I estimate it would take me more than five years to build the k 100k savings pot.
In this case, I need to rethink my passive income strategy.
There is always going to be a risk that payments will be reduced. Dividends are paid from the company’s profits. Therefore, if profits fall, dividends may be deducted.
Still, I think there is a high chance that this strategy will work. When I have achieved my goal, I can switch to earning income instead of reinvesting.
In my example above, I noticed that the average market dividend yield is 3.8%, which would yield £ 3,800 on a k 100k investment. It was not placed in stone. If I invest in the three blue-chip earnings stocks mentioned above, I can increase my annual income to about 600. This will create a passive income of 550 per month.
This strategy may not be suitable for all investors because of the risks involved in buying dividend shares. Nevertheless, I will use the method described above to create a passive income stream from high quality blue-chip equity over the next few years.
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Rupert Hargreaves owns shares in British American Tobacco. Motley Flower UK recommends British American Tobacco. Opinions expressed in the companies mentioned in this article may differ from those of the author and therefore our official recommendations in our subscription services such as Share Advisors, Hidden Winners and Pro. Here at The Motley Flower we believe that considering a variety of insights makes us a better investor.