How to make money while you sleep

Paul Summers — Sat, 17 Feb 2018 10:00:59 +0000

Want a relatively fuss-free way of dramatically increasing your wealth with minimal effort? No problem. In contrast to what some in the financial world will tell you, making money from investing can be devilishly simple. You can even earn while you sleep.

Get efficient

The first step isn’t exactly revelatory.

At the Fool, we’re continually banging on about the benefits of holding all your investments in a tax-efficient account such as a stocks and shares ISA. Not only does this protect any profits you make from income and capital gains tax, you always have access to that capital should you need it. Right now, you can invest up to £20,000 in a single year. Taking as much advantage of this allowance now can pay off over the long term.

For those that already have an ISA or are confident they won’t require access to their capital for many years, there is another option. Enter the SIPP — or Self-Invested Personal Pension.

SIPPs are an ideal, low-cost solution for those wanting to invest for the long term. In addition to being exempt from capital gains and income tax, you get tax relief on any contributions you make at your marginal rate. So, someone making an annual contribution of, say, £800 will receive an extra £200, based on a 20% marginal rate of tax. Higher rate taxpayers get an even better deal. To end up with £1000 in their pension pot, they need only contribute £600.

The benefits don’t stop there. Having a SIPP allows you complete control of your money and the opportunity to invest in a far greater range of assets than your typical mainstream pension plans. As well as being able to transfer in an existing pension, a SIPP also permits new contributions of up to £40,000 a year.

Receive, reinvest, repeat

Having set up and begun contributing to a SIPP or an ISA, you can begin generating a second stream of cash by investing in a decent-sized and sufficiently diversified basket of income-generating shares.

The beauty of adopting a dividend-focused strategy to investing is that you get paid while you’re busy getting on with life. As a part-owner of a business, you receive your share of profits that it makes regardless of whether you’re playing your favourite sport, having a coffee with friends or tucked up, counting sheep under a duvet. It’s the very definition of passive income.

As a dividend investor, there’s also no shortage of resilient, cash-generative businesses out there to buy. Oil giant Royal Dutch Shell hasn’t cut its payouts since the Second World War. Right now, its shares yield just shy of 6% — well over four times greater than the interest rate offered on the best cash savings account. Holders of stocks in power provider National Grid will get 6.3% based on its current share price; owners of Lloyds Bank will receive a forecast 6.8% this year.

Regardless of which investments you pick, the only thing you need to do in order to benefit from the beauty of compounding is reinvest what you receive back into the market. Given that you can only access your benefits (and withdraw 25% of your fund tax-free) from the age of 55, this is arguably much easier to do with a SIPP. Investing with an ISA will require a little more willpower.

The post How to make money while you sleep appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. 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.

Here’s How Dividends Can Turn £9,000 Into £179,000

Alan Oscroft — Sun, 27 Mar 2016 12:00:45 +0000

I know I keep banging on about how investing in shares is the best form of investment ever, and how reinvesting dividends can make an enormous difference to your total returns. But even now, many years after I first learned of the Barclays Equity-Gilt Study, I’m still amazed at just how much better it is to buy shares than to save your cash in a bank account.

Wait, the Barclays what? It’s a survey that compares the returns from shares, from cash in a savings account, and from gilts, every year since 1899 — and you can’t get a much more of a long-term approach than that!

Too scary!

It’s understandable that people shun the stock market over fears of losing all and instead keep their money safely in a savings account, especially after the recent financial crisis and the turn-of-the-century dotcom boom and bust. But if you have a couple of decades or more ahead of you for your investments to mature, that could be a very costly mistake.

There certainly is more risk attached to buying shares in the short term, but the risk evens out over the long term — and the longer you have, the more the risk fades way.

What the folks at Barclays have been doing is comparing rolling periods from up to the present day — that’s the periods 2004-14, 2005-15, 2006-16, and so on. And what they discovered is that over all the rolling 10-year periods of the study, investing in shares beat saving in cash 91% of the time. So if you’re looking at a 10-year horizon, the odds are strongly stacked in your favour.

Can’t lose?

But a 9% chance of losing out to cash is still significant, so how about longer periods? Well, they only had to extend the rolling periods to 18 years to get a 99% chance of shares beating cash, and that’s surely enough for most people, isn’t it? If that’s still not enough to steady your nerves, we don’t need much more to settle the matter once and for all.

You see, when Barclays examined 23-year periods, they found that shares have never been beaten by cash — not even once. And that includes all periods spanning the banking crisis, the dotcom crash… and even the great 1929 crash that allegedly had investors throwing themselves out of tall buildings. And if that doesn’t convince you, well I give up.

Dividends make the difference

But what about those dividends? Investors always have the option to either take their dividends or to reinvest them for the long term, and it can be tempting to enjoy a bit of cash while your shares appreciate in value. In fact, if you’d invested £100 in the UK stock market in 1945 and spent all the dividends over the years, you’d still have a very nice £9,148 after adjusting for inflation — more than 90 times your original investment.

But if you’d reinvested all your dividends in buying new shares, you be sitting on an inflation-adjusted pot of… wait for it: £179,695!

It was Albert Einstein who famously said that “compound interest is the eighth wonder of the world“. And he wasn’t stupid.

The post Here’s How Dividends Can Turn £9,000 Into £179,000 appeared first on The Twelfth Magpie.