If I had £17,000, I think the best thing I could do with it would be to use it to earn passive income. And I’d look to do that by investing in dividend stocks.
At today’s prices, the returns might start small. But over time, it could grow into something that would generate £6,000 a year.
How do I get the cash to start?
I don’t have £17,000 lying around. But I’m intrigued by the universal inheritance concept – a grant potentially given to every citizen at the age of 18. It’s an idea that has been suggested a few times. Last week, it was put forward by a minister in Spain.
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The scheme would hypothetically provide €20,000 (£17,000) to be used for education, training, or starting a business.
Unfortunately, investing the money in the stock market doesn’t count and I’ve not heard any indication of something similar being introduced in the UK. But it got me thinking about what I’d do with £17,000 given the chance to set myself up later in life.
I’d try to emulate my investing hero. Warren Buffett has followed a simple model – buy businesses that generate cash and use the earnings they produce to buy more businesses.
Dividend stocks
With £17,000 I wouldn’t be able to buy a business outright. Fortunately, the stock market allows me to follow Buffett’s approach by owning shares in companies that distribute their earnings as dividends.
By investing in dividend stocks, I can reinvest the cash I receive into other businesses. For example, I could buy Legal & General shares and use the dividends I received to buy shares in Unilever.
I’m not expecting to generate Buffett-like wealth. That requires a rare combination of talent and good fortune, but the FTSE 100 has returned around 6% a year, which seems more reasonable.
If I could find a way to compound a £17,000 investment at 6% for 30 years, I’d eventually have a portfolio with a market value of £97,000. And this would generate around £6,000 in passive income.
Stocks to buy
The hardest bit with getting started is working out which stocks to buy from the huge range available. But right now, I like the look of Warehouse REIT in the UK and Kraft Heinz from the US.
Warehouse REIT owns and leases industrial buildings. There’s a short-term risk of tenants defaulting on rent in a recession, but I expect the company to profit from the rise of e-commerce in the long term.
With Kraft Heinz, the bigger risk is inflation weighing on margins. But I think this risk is offset by the fact that demand for the company’s products should remain steady even in an economic downturn.
At today’s prices, Warehouse REIT has an 8% dividend yield and Kraft Heinz’s yield is 4.5%. If I had £17,000 to invest today, I’d look for a 6% return by dividing it between these two stocks.
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Getting started
I don’t know whether investing could count as a business activity for the purposes of a universal inheritance scheme. But with £17,000 to invest, I’d look to use it to start a portfolio of dividend stocks.
Reinvesting my returns could help me to grow my investment over time. And, eventually, I could have something that would offer a meaningful second income later in life.
