The Motley Fool
Royston Wild
There’s no better way of creating wealth, in my opinion, than investing in the stock market. It’s why I use the majority of my extra cash each month to buy FTSE 100 or FTSE 250 shares in my ISA.
Forget cash accounts: they’re safe, but historically speaking, the yields on these products are far too low. Property investment provides a regular stream of passive income, but start-up costs are huge. And cryptocurrencies — while on a stunning run of form right now — are far too volatile.
Over the long term, FTSE-listed shares have delivered on average an 8% annual return. But I think I could do better. Here’s how I could turn a £10,000 lump sum investment into a £43,429 passive income.
ETFs vs stocks
Don’t get me wrong: spending my cash in an index tracker fund returning 8% (through both dividends and share price rises) isn’t a bad idea. In fact, FTSE 100-tracking exchange-traded funds (ETFs) are some of the most popular investment vehicles out there.
Products like the iShares Core FTSE 100 UCITS ETF allow investors to reduce risk by spreading their capital across all the companies on the index. Management fees are also pretty low (on this one the ongoing charge stands at just 0.09%).
On the downside, owning one of these ETFs means I would also have exposure to shares with histories of delivering disappointing returns. If I hand-pick individual companies I want to own instead, I have a chance of earning an annual return above that average.
A £43,429 income
Let’s say I choose to buy a Footsie share with a dividend yield alone of 6%. This is about 2% higher than the average long-term yield on the index’s stocks.
If dividend forecasts hit their mark — and capital gains come in at the index’s historical average of 4% — a £10,000 investment would turn into £326,387 after 30 years, assuming that I reinvest dividends. That compares with the £162,926 I could have made with that ETF.
And if I then drew down 4% of this £326,387 a year, I would have an annual passive income of £13,055.
I could make an even-larger return with a regular cash investment as well. With an extra £200 invested in more FTSE 100 shares each month, I could eventually enjoy a yearly income of £43,429.
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