How I’d try to build a passive income with just £25 a week

Passive income can come from carefully selected dividend shares. Harshil Patel explores a plan to invest just £25 a week.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Light bulb with growing tree.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

I currently receive some passive income and it comes from carefully selected dividend shares. Here’s how I’d set up a new income stream if I were to start today. The first thing I’d note is that I can start with almost any amount. In my illustration, I’m planning to invest just £25 a week, so roughly £108 per month.

Long-term investing

In my opinion, one of the most important components of successful investing is time. The longer I have before needing to withdraw any income, the further my investment can grow. The long-term average stock market return is roughly 10% a year.

A word of warning, though. That is just an average, and it’s by no means guaranteed. There have been many years when the average return has been much higher, and years where it has been lower or even negative. But having a longer time frame allows me to smooth out my returns, and hopefully, at least achieve the average return.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Growing the pot

Let’s say I can save £25 a week consistently for 20 years. If I achieve the long-term average return of 10% per year and leave my returns to accumulate, I’d have a pot worth around £82,000. That’s over triple my initial outlay. I like the sound of that. However, I’d try to achieve a much greater return by carefully researching and selecting quality growth shares. I’d want to invest in faster-growing companies, particularly in the earlier years of my investment plan. I’d also select a broad basket of small-cap, mid-cap and large-cap UK and US shares. I reckon small and mid-sized companies could grow faster. And the larger companies might help my portfolio to be less volatile. Alternatively, I’d pick a few growth funds or investment trusts. Currently, I like Smithson Investment Trust and Scottish Mortgage Investment Trust.

Generating passive income

If by active selection I manage to achieve an average gain of 15% per year instead, after 20 years my pot could amount to £162,000. But how much passive income could this pot generate when I start to draw an income? Well, the average FTSE 100 dividend yield is currently 3.4%. That would give me an annual income of £5,546. However, I reckon I can find several dividend shares that distribute 6%-7% every year. Currently, I like the look of Persimmon, Rio Tinto and Vodafone.

That said, dividend yields aren’t guaranteed either. Companies can increase, decrease and even suspend payments. For example, in March 2020 several companies suspended dividend payouts due to the pandemic.

Even so, I’d say it’s important for me to find companies that are consistent and reliable dividend-payers. I’d want these businesses to have a long history of paying dividends. I’d also want these companies to be able to comfortably afford them. Lastly, I’d like to see evidence of growing earnings. If earnings can grow, I’d be more confident that my dividends might increase too.

Going back to my example, at a 6% dividend yield, my pot could generate a passive income of £9,720 every year. To me, that’s pretty good for having only invested £25 a week. But again, it’s dependendent on my investments having generated well above 6% returns for the first 20 years.

Is this a top choice for growing wealth now?

Before deciding, we think this pick is another must-see.

Discover ‘One Top Growth Stock from The Motley Fool’ absolutely FREE.

Though past performance does not guarantee future results, over the past 5 years, it’s seen consistent double-digit revenue growth. ‘Return on capital’ - a key measure of business quality - is a colossal 57%. That’s almost 6 times higher than the UK average!

Best of all, it has a cult-like following. Customers who’re raving fans, potentially spending more money, more often - whatever the economy.

In our experience, discoveries like this are extremely rare.

So please, don’t leave without seeing, ‘One Top Growth Stock from The Motley Fool’, which includes both the Risks and opportunities.

Claim your FREE copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harshil Patel owns shares of Persimmon and Scottish Mortgage Inv Trust. 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.

More on Investing Articles

Road 2025 to 2032 new year direction concept
Investing Articles

This under‑the‑radar FTSE 100 growth stock is also a secret dividend superstar!

Harvey Jones belatedly wakes up to a brilliant FTSE 100 growth stock that has an equally remarkable track record of…

Read more »

Business manager working at a pub doing the accountancy and some paperwork using a laptop computer
Investing Articles

Barratt Redrow share price plunges 9% on profits hit – time to consider buying?

Harvey Jones says FTSE 100 housebuilders continue to suffer with the Barratt Redrow share price slumping on a profit warning.…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Growth Shares

Why the next month could make or break the Lloyds share price

Jon Smith outlines two key events in coming weeks that could influence the Lloyds share price, leading him to make…

Read more »

This way, That way, The other way - pointing in different directions
Investing Articles

The B&M share price falls 13% despite improved Q1 sales. What should investors do?

Despite sales growing on a like-for-like basis, the B&M share price is falling yet again. So is the FTSE 250…

Read more »

Businessman hand stacking up arrow on wooden block cubes
Investing Articles

Prediction: in 12 months, ultra‑high-yielding Phoenix shares could turn £10,000 into…

Harvey Jones has done nicely out of his Phoenix shares, as the FTSE 100 insurer gives him both growth and…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

This FTSE 100 passive income gem now has a forecast yield of a stunning 8.5%, so should I buy more?

This FTSE 100 dividend giant already has a very high yield, and is projected to go even higher in the…

Read more »

Young Caucasian girl showing and pointing up with fingers number three against yellow background
Investing Articles

3 key reasons why I think BP’s share price could soar following a 16% fall over the year…

BP’s share price has lost considerable ground over the course of the year, but I think there are three reasons…

Read more »

Businessman hand stacking money coins with virtual percentage icons
Investing Articles

Building a second income with FTSE 100 dividend shares: my simple 3-step plan

Mark Hartley outlines a straightforward three-step approach to building a second income portfolio with well-established FTSE 100 dividend shares.

Read more »