I’m aiming to make £45,000 in passive income with UK shares and never work again!
Investing in UK shares might be one of the best ways to build a passive income. At least, I think so. Why? Because the FTSE 100 hosts some of the highest-yielding dividend stocks in the world.
Even with the disruptions of the pandemic, the index is still expected to yield 4.1% in 2022 – far ahead of the S&P 500‘s 1.37%.
Dividends may be boring versus the excitement of explosive share price growth opportunities. But in the long term, they can become a massive source of recurring income. Take Warren Buffett’s investment in Coca-Cola as an example. In 2021, he earned $672m in dividends alone. After decades of dividend growth, that’s the equivalent of a 52% annually recurring return on his original $1.3bn investment 34 years ago.
With that in mind, let’s explore how to leverage the power of dividends and compounding returns so that I can eventually say goodbye to my day job.
Reaching millionaire status with UK shares
On average, when dividends are taken into account, the FTSE 100 has generated an annualised return of around 8%. So if I invested a £10,000 lump sum today into a low-cost tracker fund, I could expect to have approximately £10,800 in a year, with around £400 of that gain coming from dividends alone.
Such a performance is obviously not guaranteed, since the stock market is a volatile place. And I may end up with less or even lose money. But let’s assume the historical average continues to repeat itself for the foreseeable future. Under this assumption, after 34 years of compounding at 8%, my portfolio value would grow to just over £136,900.
That’s not bad. But it’s certainly not enough to retire on. And definitely not enough to generate a five-figure passive income. However, if I continue to invest a small amount each month, then things start to get interesting. With an additional relatively small monthly capital injection of £500, my portfolio of UK shares across the same time period ventures into millionaire territory at £1,124,000!
Generating a £45,000 passive income
Assuming the 4.1% dividend yield is maintained, my imagined £1.12m portfolio would yield a £46,084 passive income annually. Stack the State Pension on top, and that sounds like a fairly comfortable retirement, in my opinion.
Obviously, with inflation doing its thing, such a portfolio will be worth less in the future in terms of consumer spending power. And as we’ve seen recently, the stock market does have a tendency to tumble every once in a while as companies endure economic headwinds.
A crash will inevitably happen again at some point. Many UK shares will undoubtedly cut, suspend, or even outright cancel dividend payments in such a scenario. But by diversifying my portfolio, the impact of such events can be mitigated. And by ensuring I have a reasonable amount of cash on the side, these temporary stock market downturns can be endured.
The post I’m aiming to make £45,000 in passive income with UK shares and never work again! appeared first on The Motley Fool UK.
Is this little-known company the next ‘Monster’ IPO?
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
Click here to see how you can get a copy of this report for yourself today
- Down 30%, are CRH shares a screaming buy?
- UK shares: the good, the bad, and the ugly
- How I’d invest £500 with 3 lessons from billionaire Warren Buffett
- 2 promising penny stocks to buy on the dip
- I wouldn’t buy Bitcoin today. FTSE value stocks look much better value to me
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.