With inflation already above 10% in the UK. And with predictions that this figure could more than double in the months ahead, creating a passive income stream that puts my money to work doesn’t seem like too bad an idea.

Passive income exists in multiple forms. And despite what some people think, I don’t need a huge amount of capital upfront to create some sizeable returns. Here’s the plan I’m using to build a steady stream to last me for the long term.

Start early

The most important factor for me is the idea of starting early. As a Fool, I believe long-term investing is the most efficient way to put my money to work. And as a 20-something, I have time on my side. The earlier I start, the better chance I’ll have to build a sizeable pot of cash. After all, that’s the aim.

Top up my funds

Despite time being on my side, unfortunately, an abundance of money isn’t. But like I said, I don’t need bundles of cash to put my plan into action today.

What I need to do is decide how much I am willing to give up a month. And with this cash, I want to invest it continuously. By doing this, I’ll benefit from ‘pound cost averaging’, which essentially balances out the price that I buy in at.

Reinvest my dividends

Another step I’d take to maximise my returns is by reinvesting the dividend payouts I receive. From this, I can benefit from compounding. For example, if I own a stock that pays me a 6% dividend, and generates 7% growth per year, that gives me a 13% annual return. Over the course of a few years, this may not seem great. However, an initial £500 investment compounded over 30 years (the length of time I aim to invest for) would return £24,000.

What’s more, should I incorporate the monthly payments (say £30) I’d have been adding, after 30 years this amount would be around £155,000!

Pick high-quality companies

The final factor I’d consider is the quality of the company I chose to invest in.

I want to avoid assets like growth stocks as they often don’t pay dividends to shareholders. Instead, I want to pick dividend stalwarts that have a strong track record of paying out to investors in times gone by. These businesses would hopefully allow me to see growth. And, more importantly, they would keep my passive income stream running.

Some examples of these types of companies include Lloyds and BT.

There’s always a risk

Despite the above, I must always be wary that no dividend is guaranteed. These payments can be cut off by a business at any time if they choose to. I must also be conscious of the fact I may see lower returns than I expected. Both of these could put my plan in jeopardy.

Luckily, investing in multiple companies will help mitigate the risk of this happening. And by following these steps, I’m confident I could build a lifelong passive income stream.

The post Here’s my plan for building lifelong passive income! appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.

There are many ways to earn a profit in the stock market (and an equal amount of ways to make a loss!). A favourite method among investors to earn passive income is by owning dividend shares.

With inflation and interest rates on the rise, the stock market is becoming increasingly volatile. For this reason, I am on the hunt for high-yielding, low-risk dividend stocks I can add to my portfolio.

By investing as little as £100 a month into these stocks, and reinvesting the dividends, I believe I could be making well over £10k a year by the time I retire. Here’s how I plan to do it.

The method

I am currently 21, so I would be looking to pay £100 a month for the next 30 years. A spare £100 may be hard to find, but for context, skipping a £3 morning coffee each day pretty much covers it!

The key here is to keep up my payments and reinvest my dividends. By reinvesting my dividends, I can benefit from compound interest. For instance, starting at £0, and by investing £100 a month for 30 years, I could end up with well over £400,000, assuming a 13% annual total return (dividends plus company growth).

Assuming the above growth rate, I would reach my £10k target by year 18.

The stocks

I want to be earning passive income, which means I need to pick high-yielding dividend stocks. The best companies to pick here are slow-growth, stalwart industry giants. These companies are the most likely to turn over regular dividends and keep producing cash flows. A small amount of industry research and checking historic dividend payments should help me here.

A method I would plan to use in order to minimise risk would be to diversify my portfolio. This means picking high-dividend stocks across separate industries. Therefore, if one sector underperforms, its losses may be made up for by growth in another sector.

With the macroeconomic outlook looking increasingly uncertain for the next few years, this could be an essential method to employ.

The risks

While this sounds great on paper, it is not a foolproof method. There is no way of predicting a stock’s future dividend payments or annual returns (if there was, we would all be rich!).

Events like the Covid-19 pandemic force companies to skip dividends and even stop paying them for long periods of time. For this reason, it might take me longer than 18 years to reach my goal of £10k in passive income.

However, by year 30, I am confident that I will be able to hit that goal, even if I have to make some minor changes to my dividend portfolio along the way.

The post How I’m using £100 a month to try to earn £10k a year in passive income appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has recommended Vodafone. 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.

Making regular passive income must be the ultimate lifestyle improvement tip when it comes to finances. It’s no wonder it’s become more popular these days, helping people have that little bit extra money for whatever they want it for.

For me, my dream was to retire early and spend time doing what I love, not just what pays the bills. And it was only through creating enough passive income that I was able to do so.

But, it can be tricky to find the right investments for my portfolio. These are two of my favourites that both play their part in letting me live my life how I choose to.

A growing dividend stable earner

City of London Investment Group (LSE: CLIG) have long been one of my favourite shares that I hold. I first bought this back in 2013 and every year since it’s paid out a chunky dividend. In fact, it’s grown by 9% on average since it started paying a dividend in 2007.

At the moment, it’s still trading down about 15% year to date, giving a historic-based dividend yield of around 7.8%.

If I didn’t already own plenty of these shares in my portfolio, I’d be happy to top up again.

A passive income diversified ETF

Next up, one of my favourite footsie-based ETFs, the not-so-catchily named iShares UK Dividend UCITS ETF (LSE: IUKD).

When I’m looking to live off my passive income portfolio, stability is good. And one way for me to achieve that is through this ETF. That’s because it invests in the top 50 individual high-yielding shares in the FTSE 350 after some basic screening.

If one company runs into issues and decides to cut their dividend, the average dividend yield will fall slightly. That’s much more manageable for me in terms of cash-flow than suddenly receiving nothing.

True, it comes with a slight cost for that benefit, but at 0.4% I think it’s reasonable for what I get.

Currently, it’s returning a potential dividend of around 6%, which I consider pretty good for something with those diversification upsides.

Again, it’s another I’d be happy to add to if I didn’t already own enough for my portfolio.

Playing the long game

At this point, you may be wondering if I’ve simply cherry-picked the passive income investments that have worked out best for me to make this article sound good.

The truth is, no, I own others that worked out better. And there are also those that turned out worse. The honest answer is that not all shares will work out — and that’s okay.

Because that’s why owning a diversified portfolio and holding onto it over the long term was the number one most important thing I did.

It was fundamental for growing my wealth in the first place. And then for turning that wealth into a passive income portfolio I now live off.

After all, I’m all about putting your money where your mouth is. And these tips helped me do exactly that.

The post WARNING! These passive income ideas seriously changed my life! appeared first on The Twelfth Magpie.

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• I’ve opened a Junior SIPP for my daughter. What stock should I buy with £250?
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Michelle Freeman has positions in City of London Investment Group and iShares UK Dividend UCITS ETF. The Motley Fool UK has recommended City of London Investment Group. 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.

The finance firm’s stock looks cheap right now with a yield of over 9%. But should I invest or be wary of a value trap? Let’s find out. 

Passive income is the way 

My main goal for my investing journey is to maximise savings from my day job and retire early. And this quest for financial freedom isn’t unique. Millions of investors have slowly woken up to the power of dividends. Looking at the Google search data for ‘passive income’ since 2004 (see chart below), the jump in popularity over the last two years is clear.

A stable passive income portfolio could be incredibly rewarding in the long run. Many investors have used dividends to retire in their 40s. And it doesn’t require complicated analysis either. Looking for stable businesses with strong cash flow and a history of dividend hikes is a good starting point. How do Abrdn shares fare in these areas? 

Share price analysis 

Abrdn shares are currently trading at 160p at a price-earnings ratio of a measly 3.5 times. Factoring in the 9.1% dividend yield, this asset manager’s stock looks very attractive on paper. 

But shareholders have been selling this stock in record numbers. Down 44% over the last 12 months, Abrdn shares rank 98th in the FTSE 100 for returns. 

Looking at the 2021 results, I think the asset manager had a strong year. Its fee-based revenue model generated over £1.5bn from its total assets under management (AUM) worth £542bn.

As of 2022, Abrdn’s 9.1% yield is covered 1.18 times on an adjusted capital generation basis. While this is higher than 2020’s cover of 0.84 times, the board has made it clear that the current 14.6p per share payout will remain unchanged until a capital cover of  1.5 times is met. 

This makes a dividend rise in 2022 unlikely. But the board is confident of a progressive dividend hike in the next few years so the firm may be able to maintain its high yield longer term.

A major concern here is the revenue from fees. The current economic slowdown is already affecting the average trading volume in the US and UK. People are likely to protect savings during inflation, which could cause private investment figures to drop. And historically, finance firms perform poorly during inflation because of lower activity. 

I also understand that passive income can’t make me rich overnight or completely offset the effects of inflation. Depending on my capital, it could take decades of diligent investing before payouts are large enough to support my retirement.

However, as a passive income option for the long term, the Abrdn share price looks very attractive right now. The company seems to be in a decent financial position and the board is expecting a tidy jump in earnings this year as well. But I think I will wait for the half-yearly results scheduled for 9 August. I’d consider an investment in Abrdn if the results look favourable.

The post Should I buy Abrdn shares just for the 9.1% dividend?  appeared first on The Twelfth Magpie.

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• How much second income could I make from £10k in the stock market?
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• How much do I have to invest in this newly-promoted FTSE gem to target £7,927 a year in passive income?
• Aberdeen shares are back in the FTSE 100 — is this turnaround stock just getting started?

Suraj Radhakrishnan 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.

The average retirement age in the UK is 64.5 years and it’s set to rise. And while financial freedom, early retirement and leaving behind the nine-to-five grind are the dreams of many, very few achieve this. However, more people like me are waking up to the power of creating passive income streams. And as a young investor, I have been actively researching investment routes that help create a passive income portfolio to slowly build wealth.

With an aim of retiring by my late 50s, I think I have created a template that could give me that extra decade of retirement time to enjoy. And all it takes is a few hours a month of planning and investing. 

#1 Reinvesting dividends

I have set aside £10,000 to kickstart my passive income portfolio. And with this, I am looking at DRIP (Dividend Reinvestment Plan) as the primary way to keep my passive income portfolio growing in line with expected inflation. 

The DRIP strategy uses the power of compounding. This simple tool is used by investors like Warren Buffett, whose company made $3.8bn in dividends alone in 2018. For the next 20 years, I will reinvest every dividend payout back into my initial investment. And this could increase my payout figures by over two times by the time I am 50. 

Let us assume I pick a stock from the dividend-rich FTSE 100. Companies like M&G and Rio Tinto are dividend aristocrats that offer 8%+ yields and have raised payouts steadily over decades. And I think they could, if current projections are maintained, offer a steady 5% annual yield on average.

Assuming 0% share price and dividend growth over the 20-year period, my investment would be worth £20,000 without DRIP. A £10,000 income from dividends sounds awesome, but it could be so much better.

With DRIP, the same investment would be worth £26,532.98. And the most impressive fact is that my dividend payout after the 20 years would be £1,263.48 received every year. This is over two times the £500 I would receive every year without DRIP. 

#2 Systematic investments

I am also looking to invest an extra £500 a month into this pot, amounting to £6,000 a year, for 20 years. This would take my total investment to £130,000.

And with DRIP investing and systematic payments every year, the final amount would become a whopping £224,928.70 with a payout of £10,425.18 that I will receive every year. I think I could easily receive £1,000 a month with some share price or dividend growth over 20 years. Not a shabby foundation for a passive income play, right?

However, it is important to note that dividend payouts will fluctuate. Dividends can be scrapped when a company (or the economy) struggles. I could actually lose money. Just picking companies with cash reserves or large market shares will not be enough. Being diligent and monitoring my investments periodically is crucial.

Also, putting all my eggs in one basket is unwise. I will continue investing in growth stocks from sectors I see as fairly future-proof to diversify. But I think these two guidelines are a great starting point for me to target a £1,000-a-month passive income stream.

The post Here’s how a £500 passive income plan could help me retire early appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Suraj Radhakrishnan 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.

City of London Investment Group (LSE:CLIG) is not exactly a household name, unlike so many of the more popular passive income investments you read about.

It’s not like a Rio Tinto or Royal Mail, where it’s easier to understand what they do. But it is a long-standing favourite of mine, so let’s introduce it properly.

What does it actually do?

Known for convenience as CLIG, you might first think it’s just like any other fund manager. But there’s one key difference here, in that it specialises in closed-end funds.

Originally focused on emerging markets, it has since widened that scope geographically. That’s alongside including other specialist investment types, like REITs (real estate investment trusts).

Why do I highly rate this passive income payer?

Why I like this particular investment comes down to three main reasons:

Consistency: CLIG first started paying a dividend in 2007 and has never missed a year since, not even through the 2008 financial and 2020 pandemic respective crashes.

I find that very reassuring, and it tells me that management are committed to returning value to its investors.

Growth: Consistently growing a dividend is another trademark of a great passive income investment. CLIG, from its starting dividend of 10p, has grown, on average, around 9% per year.

While it wasn’t always a smooth rise, that’s an overall dividend growth rate I’m very happy with.

Diversification: Spreading your risk is important in any investment portfolio and by investing in CLIG, I can indirectly gain exposure to closed-end funds and REITs globally. As I’m low on those in my own portfolio, this means I’m unlikely to duplicate existing holdings.

Those are all great reasons, but, as ever, there are risks to consider, so let’s get into those now.

What are the concerns with City of London Investment Group?

I see two key risks to assess with this particular investment:

Dividend Cover: CLIG can be seen to have a low dividend cover rate over time. While it usually keeps to around 1.5, it did fall to a mere 1.01 in 2020. Since then, it’s recovered back to 1.19, with management forecasting a return to the 1.5 level.

Changes at the top: Barry Olliff, founder of City of London Investment Group, is due to retire from his directorship on 31 July. With several other board changes at the same time, there’s a risk of a change of direction or lack of focus on delivery.

Do I think City of London Investment Group is a good buy now?

I first bought CLIG back in 2013, at the now bargain-seeming price of £2.58p. Since then, alongside that consistent passive income stream, it’s risen to well over £5 at times.

Recently, like many shares, it’s fallen from those highs – down about 15% this year, to around £4.20p. At that price it’s now offering a healthy 7.5% dividend yield.

And while market-timing is not a game I play, I have taken the opportunity to add to that original purchase.

Because as a long-term Foolish investor, I want exactly the kind of passive income investment it offers. And I see no reason for that not to continue for several years yet.

The post Why is City of London Investment Group such a great passive income payer? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Michelle Freeman has positions in City of London Investment Group. The Motley Fool UK has recommended City of London Investment Group. 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.

For most investors who go down the passive income route, it is no more than a way to add a little extra cash every year. This is because the average yield of the FTSE 100 is around 3.4%. And for investors working with smaller sums of cash, this amounts to little compared to the lure of investing in trending stocks that could skyrocket in a year.

We are all aware of the power of compounding returns. What if I combine the safety of passive income and the power of compounding returns to boost long-term earnings? Can this strategy help me turn my passive income into a retirement-worthy sum?

DRIP investing to boost passive income

Short for ‘dividend reinvestment plan’, DRIP investing is a less-explored style of using passive income, which could grow returns over the long-term by two or even three times (3x). The idea is simple: every time I receive a dividend payout from my investment, I reinvest it back, repurchasing shares in the same company.

This strategy allows me to increase the number of shares I hold in the company. And this, in turn, boosts my payouts every year, which allows me to repurchase a larger chunk of shares. And as I follow the Foolish investment philosophy of investing for the long term, this could vastly boost my returns if I pick the right dividend stocks.

DRIP vs normal dividend investing

Allow me to demonstrate the possible returns with the magic of mathematics. I have chosen dividend aristocrat Legal & General (LSE:LGEN), which has a current yield of 7.4% and has historically generated strong capital every year (with plans of boosting yield year on year).

I am willing to invest a £10,000 lump sum investment in the company with plans of holding it for 30 years. This would get me 4,098 shares at the current share price of 244p. I am placing the average yield of Legal & General shares at 5% (accounting for fluctuations) paid annually, with a 3% increase in yield every year and 0% share price growth.

Without DRIP investing: after 30 years 

Final investment value: £10,000 (assuming 0% share price growth) 

Final dividend income: £23,785.61 

Total investment returns: £33,785.6

With DRIP investing: after 30 years

Dividend contribution: £88,146.52

Total investment returns: £98,145.64

It is clear that, over time, this passive income strategy could yield nearly 3x more than just holding dividends. And at the end of 30 years, I would own 35,983 shares in the company.

Although I assumed a share price growth of 0%, it will fluctuate. If there is a fall in share price, the yield could go up in relation, boosting my returns. If there is share price growth, I could turn my £10,000 to £100,000 with this strategy.

Risks to consider

A passive-income strategy comes with risks, too. Any company could cut dividends if revenue is affected. And for Legal & General, economic turbulence could affect income as it operates in the finance sector. A long history of dividend growth does not guarantee future returns. And for this strategy to succeed, a steady payout is absolutely crucial.

It is clear that picking a winning passive income share is the first step. But I think by sticking to blue-chip dividend shares and being diligent, I could vastly boost the earning capacity of my portfolio using the DRIP method.

The post The secret passive income strategy I’m using to try to 3x my returns! appeared first on The Twelfth Magpie.

More reading

• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• Here’s why I bought this 7.6%-yielding FTSE 100 dividend stock instead of saving in a Cash ISA
• How much would you need in a Stocks and Shares ISA to match the State Pension?
• Here’s a quick and easy way to start earning passive income this summer with a spare £1,000
• How much would I need to invest in these FTSE 100 dividend gems for a £29,061 ISA passive income?

Suraj Radhakrishnan 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.

I hadn’t heard of passive income back when I started investing. And I’ll admit it, I was nervous when buying my first share.

After all, I grew up in an environment where stock markets were considered dangerous, risky. They were something that only rich people played with.

But now, after almost 10 years of investing, that first stock– and others like it — turned out to be a key step to retiring early in my forties.

How did I start investing in shares?

I’ll be honest, I only started thinking about buying shares when other options, like savings accounts, started cutting interest rates. The further they fell, the more I knew I would have to do something different if I wanted to continue to grow my wealth.

So, I got curious. I started learning about how stock markets worked. Sites like The Motley Fool and the like are full of useful information, and I devoured them.

I was reassured by the long-term performance of stock markets, which was vastly different to the off-putting screaming ‘buy/sell now’ over-hyped headlines.

For example, if you look at the FTSE 100 over all the different 10-year periods it has been trading, you will get a range of annual returns from -8.7% to +19%. But no individual 10-year period has ever lost an investor money.

That was hugely comforting. Plus, the average 10-year return was around a healthy 8.9%. It was time to take the plunge and buy my first ever stock.

What was my first ever passive income share?

It might surprise you to learn that my first ever passive income share was the perhaps lesser known company called City Of London Investment Group (LSE:CLIG).

Why this company? I liked its track record of dividend payments, and it had a clear strategy for the future that made sense to me.

It was also out of favour in the markets, far down from its 52-week high of ~£4. I ended up buying 558 shares at £2.49, giving a dividend yield near 10%.

In fact, if I add up all the passive income I’ve received through dividend payments, it’s more than I paid for the original investment! And that’s ignoring the fact I could still sell those shares today for a healthy profit.

Those numbers might not look much to some, but I’ve since added to this and other holdings over the years. And then that’s when the real ‘magic’ happens. Slowly and steadily, you end up owning a substantial, diversified, passive income portfolio.

The truth of risk and reward

Now, I’m not sharing this to boast about my investment success. That’s not my style and they don’t all work out so well. I’ve had my failures, too, for sure.

But the real point here is, yes, stock markets are risky. It’s one of the hard truths of investing – reward needs risk.

But by investing over the long term, those risks are far more in my favour, so long as I diversify my portfolio and choose wisely.  

And that’s why I’ll continue to invest in good companies for the long term – after all, it’s the Foolish way!

The post How passive income helped me retire (really!) early appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Michelle Freeman holds shares in City Of London Investment Group. The Motley Fool UK has recommended City of London Investment Group. 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.

They say the first step is always the hardest. Or is it? Today, I’m going to explain how anyone can build a passive income stream by setting aside just £1 a day. 

What? Just £1?!

The idea of just investing £1 a day sounds a bit ludicrous, so let me explain. The actual amount put aside every day doesn’t really matter, at least initially. It could be £2, or £5, or £10, or whatever. Obviously, £10 a day is better than £1, but that may not be doable for a lot of people.

The point is simply to make the process as free of friction as possible by keeping the amount saved small enough to not seem daunting. This increases the likelihood of it becoming a habit. And developing a good savings habit is fundamental to building wealth over the long term.

Now, investing £1 a day isn’t practical. Every three months (£91), every six months (£183) or every year (£365) makes more sense. Regardless of how regularly I buy, I’d be sure to pick a stockbroker that charges low/zero commission when I use their regular investing service. This simply invests my money automatically on a set day rather than a day of my choosing. 

Next steps

The question that now presents itself is what to buy with this money. For passive income, I’d target dividend-paying stocks. These are companies that choose to distribute a proportion of profits to investors on a quarterly, or bi-annual, basis. Positively, there’s no shortage of such businesses on the London market. 

The only issue with the above approach is that dividends are never guaranteed. So throwing all my accumulated cash into just one stock is risky.

Clearly, one solution to this would be to spread my money around a number of companies. Since we’re only starting to invest using a small amount of money, I’d probably buy a cheap exchange-traded fund that tracks an index such as the FTSE 100. Here, I’d get access to a big group of stocks in one click! Buying individual stocks is something to do further down the line.

Out of interest, the FTSE 100 yields 3.5% right now. That’s an awful lot more than the 0.67% I’d get from a Cash ISA. In fact, holding that £365 saved every year as cash is just about the worst thing I can do.

Due to the paltry amount of interest I’d be getting, it would actually lose value over time, due to inflation. Instead, I’d save my £365 into a Stocks and Shares ISA. Doing so also ensures I’ll pay no tax on the passive income I receive.

Have a little patience

I think the hardest part of growing a passive income stream is being patient. After all, investing that £365 in a FTSE 100 tracker wouldn’t generate much in the way of dividends from the off.

There are ways of turbocharging this amount, such as increasing the amount of cash per day I save once the habit has formed. I could go from £1 per day in Year One, to £2 in Year Two, to £3 in Year Three, and so on. 

Since there’s no rule to say an investor must spend the money received, I’d make a point of always reinvesting it into buying more shares to benefit from compounding. By the time I really want to use that income, I should have a far larger amount to draw on.

The post How I’d build passive income from £1 a day appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers 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.

Ten years on, the Vanguard LifeStrategy range continues to be hugely popular with UK retail investors. Today, I’m looking at the arguments for and against having one of these funds as my entire portfolio.

Let’s quickly recap on how they work.

Vanguard LifeStrategy: one-fund investing

Vanguard’s LifeStrategy range is made up of five funds. Each of these differ in the proportion of equities and bonds they hold. So, the LifeStrategy 100% Equity fund invests 100% in stocks. The majority of these are from developed markets, such as the US and UK. 

However, the LifeStrategy 80% Equity fund — which I personally hold — only invests 80% in stocks. The remaining 20% goes into bonds. The LifeStrategy 60% Equity and LifeStrategy 40% Equity therefore offer an increasingly cautious mix. 

If I were very risk-averse, I could opt for the LifeStrategy 20% Equity fund (20/80 equity/bond split). 

Some advantages…

There’s are many reasons why the Vanguard LifeStrategy range has accrued £29bn of investors’ capital over the last 10 years.

#1. Instant diversification. With a few mouse clicks, these passive funds allow me to spread my cash around a massive number of stocks and bonds. Trying to do this any other way would be pretty impractical and expensive.

#2. Low fees. It costs far less to manage a passive fund compared to one run by a human money manager. This allows Vanguard to set its LifeStrategy fees at just 0.22%. Keeping costs low can have a huge impact on returns over time.

#3. Fuss-free. Checking in to my portfolio sporadically is vital if I’m to reach my financial goals. However, the Vanguard LifeStrategy funds require no maintenance. Rebalancing is done automatically. This ensures the equity/bond weighting is maintained. 

#4. Great performance (so far). Since launching in 2011, the funds have beaten a good proportion of their active counterparts. The LifeStrategy 80%, for example, has climbed 150% in value. 

Some drawbacks…

#1. Can’t beat the market. By its very nature, an investment product designed to track market returns will never beat it. As such, a Vanguard LifeStrategy fund will not radically grow my wealth in double-quick time. There’s also no guarantee the performance to date will be repeated.

#2. Too diversified. As Warren Buffett said, diversification “makes little sense if you know what you’re doing.” Those with a tolerance for risk may do better by being more concentrated in only a few (brilliant) stocks. Passive investing means I’m compelled to own market dogs as well as stars.

#3. No small-cap focus. The LifeStrategy funds only hold stocks from the biggest firms in the world. Therefore, I’d need to find another way of getting exposure to smaller, faster-growing companies. Historically, these have delivered greater gains over the very long term.

#4. Inflation. Bonds tend to be negatively correlated with stocks. Holding them is therefore seen as a way of reducing risk. However, inflation is problematic for fixed assets. This could mean those funds with higher bond weightings could struggle going forward.

What I’m doing

I’m happy to keep a Vanguard LifeStrategy fund as a core holding in my portfolio. Even so, I enjoy trying to generate an even better return through my own stock-picking. Whether this actually happens is another thing entirely!

That said, a single fund portfolio like this would probably be ideal if I didn’t have the time, energy, or inclination to follow the stock market’s inevitable twists and turns.

The post Vanguard LifeStrategy: is a single fund all I need? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers owns shares in Vanguard LifteStrategy 80% Equity. 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.