How I’d aim to generate a passive income with just £50 a week

Various denominations of notes in a pile

I believe investing in stocks and shares is one of the most straightforward ways of generating a passive income. Here is the strategy I would use to generate a passive income with an investment of just £50 a week. 

Passive income strategy

To make it clear, I am not saying I will be able to generate passive income immediately with just £50 a week. It will take time to build a pot large enough to generate a passive income. 

For example, based on the market’s average dividend yield of around 3.8%, I estimate I will need to build a pot of £100,000 to generate a passive income of £3,800 a year. 

To go about hitting this target, I would invest my money in dividend stocks. I think this will create a virtuous cycle whereby I will be able to reinvest the money earned from these investments and turbocharge the growth of my savings pot. 

British bank notes and coins

Some of my favourite passive income stocks on the market are Phoenix Group, British American Tobacco and Legal & General. At the time of writing, these companies support an average dividend yield of 6.6%. 

Assuming this income level remains constant and these companies do not achieve capital growth, I estimated it would take 20 years of investing £50 a week into them to build a passive income pot worth £107,000. 

Growth estimates

Of course, these are just estimates. I could invest more or less during this period. A small change in how much I put away could have a significant impact on returns, as could changes in the companies’ payouts.

Increasing my deposit to just £60 a week would enable me to hit the target within 18 years. On the other hand, if these companies cut their dividends by 50%, I estimate it would take me five years longer to build the £100k savings pot. 

In this situation, I will have to revisit my passive income strategy. 

There is always going to be a risk that the payouts will be reduced. Dividends are paid out of company profits. Therefore, if profits decline, the dividend may have to be cut. 

Still, I think this strategy has a high chance of working. When I have hit my target, I can switch to taking income out rather than reinvesting. 

In my example above, I noted that the average market dividend yield is 3.8%, which would yield an income of £3,800 on an investment of £100k. This is not set in stone. If I remain invested in the three blue-chip income stocks outlined above, I could boost my annual income to around £6,600. That would generate a passive income of £550 a month. 

This strategy might not be suitable for all investors due to the risks involved with buying dividend shares. Nevertheless, I would use the approach outlined above to build a passive income stream from high-quality blue-chip equities over the next few years. 

The post How I’d aim to generate a passive income with just £50 a week appeared first on The Motley Fool UK.

Inflation Is Coming: 3 Shares To Try And Hedge Against Rising Prices

Make no mistake… inflation is coming.

Some people are running scared, but there’s one thing we believe we should avoid doing at all costs when inflation hits… and that’s doing nothing.

Money that just sits in the bank can often lose value each and every year. But to savvy savers and investors, where to consider putting their money is the million-dollar question.

That’s why we’ve put together a brand-new special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation…

…because no matter what the economy is doing, a savvy investor will want their money working for them, inflation or not!

Best of all, we’re giving this report away completely FREE today!

Simply click here, enter your email address, and we’ll send it to you right away.

More reading

  • How I’d invest £20k in a Stocks and Shares ISA
  • The IAG share price: opportunity or trap?
  • Top British dividend stocks for October
  • Facing unemployment now furlough has ended? Here are 10 interview must-knows
  • Here’s how you can save pounds and kilos during World Vegetarian Month

Rupert Hargreaves owns shares of British American Tobacco. The Motley Fool UK has recommended British American Tobacco. 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.