Invessting in the stock market can be a great way of earning passive income. And I think it’s possible to turn £20 per week into £4,500 in annual income.
That involves aiming for a 6% annual return over a 30-year period. In my view, that’s achievable with some careful investing and patience.
My passive income strategy has two parts to it. The first part is finding the right stocks to buy and the second is buying them at the right time.
Stocks to buy
Finding stocks to buy can be tricky – there are plenty of traps to fall into. Fortunately, by following some basic principles, it’s possible for investors like me to stay clear of most of them.
The most important thing for me is to find investments that will be able to generate passive income 30 years from now. That means they need to be durable.
Usually, this involves having something that will allow a company to fend off competition over time. This can come from various sources, but some are more obvious than others.
Unilever, for example, has a couple of important advantages. Its huge scale allows it to keep its production costs down and its strong brands allow it to maintain strong margins.
It’s also important that I stick to companies I can understand. In order to assess whether a stock will be a good investment 30 years from now, I need to be able to understand it in some detail.
That rules out stocks like British American Tobacco for me. Despite its attractive dividend yield, the outlook for smoking is just too unpredictable for it to be something I can invest in.
When to buy
The other part of my plan involves buying shares at the right time. Even if I can find the right companies to invest in, buying them at the wrong time is likely to result in bad returns.
Rightmove, for example, currently pays 8.5p in dividends per share. Whether that’s a good return depends on how much someone paid for the stock.
For an investor who bought the stock at the end of 2021, that’s a yield of around 1%. But someone who bought Rightmove shares in October 2022 would be getting a 2% return.
Buying at the right time isn’t about working out when shares are at their lowest point. In reality, it’s almost impossible to know when a stock still has further to fall.
Instead, it comes down to buying shares when they’re trading below their intrinsic value. This often happens when there’s some sort of negative sentiment around the company.
As long as I can stick to buying shares for less than they’re worth, I should be able to earn a decent return over time. And that’s true whether share prices go up or down in the near future.
Getting it right
The two parts of the plan are related. The key to both is focusing on companies that I can understand.
If a company is outside my circle of competence, I’m not going to be able to understand its competitive advantages. I’m also not going to be able to judge its value accurately.
With a business that I can understand, though, things are different. I’m able to make the kind of judgements that will allow me to earn lifelong passive income with a weekly investment.
