Last week, I went to an upmarket chain coffee shop in central London. One of the coffee options to buy was a staggering £5.50. Now this isn’t a post about the problems around inflation. But it did get me thinking. If I took this £5.50 and instead put it to work to try and make passive income each day, what could the results be over time?
Getting my ducks in a row
Let’s clarify a few things. I’m not wanting to invest £5.50 everyday in the stock market. Transaction costs would make this pointless. Rather, I’d save the amount and, at the end of each month, invest the £165.
I’m also not claiming that I’m only going to invest this amount. If I have spare cash unspent during a month, I can always put this to work as well. But I want to highlight that even with a relatively small amount of money each day, I can build a passive income.
Finally, I acknowledge the difficulties in trying to forecast income potential when using dividend stocks. This is because dividend income varies depending on the financial performance of the business. I’m going to assume the current dividend yield stays the same, but there’s obviously an assumption that is being made here.
How the numbers start to add up
Each month, I’m going to put £165 into dividend stocks. I’m going to aim to buy a different stock each month so, over the course of a year, I will have a dozen in my portfolio. From then on, I’ll aim to stick to building up my shares in these specific companies.
Any dividends I get, I’ll reinvest back into buying more shares. In terms of a dividend yield, I feel a 6.5% target is achievable.
Let’s ratchet this up over the course of the next 15 years. By this point, I should have a pot worth £46.3k, meaning that for the following year, I could earn just over £3k in passive income, without investing another penny.
Given my current age, this then allows me plenty of time to enjoy this income later in life.
Dividend stocks I like
Times will change as I invest further down the line, but there are certain stocks I like, based on historical performance.
For example, I’m pretty sure I would include the likes of National Grid and British American Tobacco in my portfolio at some point in the next decade. Both stocks have over two decades worth of consectutive dividend growth.
I’m also open to new ideas that will present themselves in the future. For example, if International Consolidated Airlines Group started to pay a dividend, it’s definitely a stock I’d consider adding.
Ultimately, even by skipping a London coffee in the morning, I can be on my way to a second income.
The post Lifelong passive income for the price of a daily London coffee? Here’s how appeared first on The Motley Fool UK.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. 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.
