The Motley Fool

How to start generating passive income with as little as £500

By Dylan Hood

Building a reliable passive income stream might seem like a daunting task, especially if I don’t have loads of spare cash lying around. However, in the stock market, even small initial sums can snowball into substantial wealth over time.

For example, the FTSE 100 has generated a 6.9% annualised return over the last 20 years. If I’d invested £500 back then and reinvested the returns along with just an additional £20 contribution per month, my initial investment would be worth £12,000 today.

One of the most effective strategies to achieve this kind of growth is by harnessing the power of dividend shares and compounding their returns over time. I’m going to take a look at the steps I would take to start generating cash using this method with as little as £500.
The power of dividend shares
Out of the numerous investment options available, high-yielding dividend stocks stand out when trying to build passive income. Many established UK companies have generous dividend policies: the FTSE 100 average yield is around 4% to be exact. These dividends grant investors access to a portion of the company’s profits and can quickly fuel a significant passive income stream.

Sure, savings accounts might offer similar yields, but stocks offer something that savings accounts don’t: the potential for growth. This potential does come with risks, as dividends could be reduced, and stock prices often fall before they rise. However, in my opinion, the potential for returns far outweighs these risks.

Picking the right stocks to compound interest
There are currently over 2,000 companies listed on the London Stock Exchange, but not all of them pay a dividend. Not only do I need to pick a stock that pays a dividend, but I want to choose one that has a stable history of paying investors. Past dividend payments are no indication of future returns. However, a strong track record of payments usually indicates some stability in the profitability of that company

There are 58 stocks within the FTSE 350 that have consistently increased dividends for at least a decade. These are the companies I would start with.

To mitigate risk, I would split my £500 between two or three businesses. Even with a small investment, diversification can significantly reduce portfolio risk.

In order to maximise my returns, I would reinvest my dividends after they’re paid to me. This reinvestment would allow me to buy more shares, in turn generating more dividends. This is known as compounding and it can be a powerful tool. This snowball effect can build my initial £500 investment into a substantial passive income stream over the long term.

In conclusion, generating a passive income portfolio with as little as £500 is not only possible but also very realistic. To start generating cash today, I’d focus on high-dividend stocks with a history of consistent payouts. By reinvesting the dividends I earn on these stocks, I can continue to grow my passive income stream for years to come.

£££££££££

AJ Bell have reduced their charges to £5.00 making investing small

sums possible but maybe more than £200.00 would be better.

By Christopher Ruane

The Motley Fool

A lot of people dream of starting their own business. In some cases, they do and are wildly successful. But a lot of people find that the entrepreneurial life ends up costing rather than making them money.

In fact, that is one reason lots of people, including me, buy dividend shares. They can offer me some of the financial benefits potentially associated with starting a business, without some of the hassles.
Everyone’s situation is different. But here are three possible advantages I see for myself in buying dividend shares rather than starting my own business.

Short-term cash flows
Some businesses make money from day one. But a lot do not. In fact, many start up businesses drain cash for years.

That can be true for companies listed on the stock exchange, too. Deliveroo, for example, saw almost a quarter of a billion pounds more cash go out the door than come in last year. Unsurprisingly, it does not pay a dividend.
But a lot of well-established listed companies are highly profitable. Dividends are never guaranteed, but many businesses have paid them for decades and look set to keep paying in future. Take my shareholding in British American Tobacco, for example. It pays a quarterly dividend and has done so since last century.

If I had a spare few thousand pounds and put it into setting up a business today, it could be months or years before it generated cash for me (if it ever did). But if I put that money into a selection of carefully chosen dividend shares, I could hopefully start earning money from it in a matter of months.

Expertise and reach
Setting up a successful business requires more than just a good idea. A range of skills are involved – and usually to make things work over the long term, a business needs a competitive advantage.

Maybe I want to set up a company making soap. But firms like Unilever and PZ Cussons are already expert at it, with a range of business professionals to make things tick over smoothly. Or I might want to set up a bakery – but then again, Greggs already has a far deeper expertise in baking than I am ever likely to have. In such cases, should I try and figure out my own competitive advantage or simply piggyback on an existing one?

That does not mean I could not set up my own company and enjoy commercial success. But if a large company already has the proven ability to make money from an idea like my own, rather than try and do it myself, I could simply invest in such firms, sit back and hope to benefit from their success.

Dividend shares and liquidity
If a company in which I invest does differently to how I expect, or I change my investing approach, I can sell the shares. I could sell my shares in British American Tobacco and reinvest the money in a different company in a matter of minutes.

Setting up my own business would take time. If I changed my mind, I would probably not be able to sell it in a few minutes, like I can with the dividend shares in my portfolio.

By Dr. James Fox

Compounding
Collectively, these actions are the basis of a promising compound returns strategy. This is the practice of reinvesting dividends over time to achieve exponential gains.

For example, if I invested £20,000 in a company with a 8% yield, at the end of the year I could expect to have £21,600, assuming the share price of the stock in question remained constant.

That’s fine, but it’s not groundbreaking. The impressive bit comes when we reinvest that dividend year after year.

Without regular contributions, it would take 38 years to turn £20k into £400k. But if I were to contribute £300 a month, and increased that contribution by 5% annually, I could get there in 21 years.

Naturally, the more I contribute, and the greater my starting figure, the easier it is to get there. And after 21 years, it’s worth highlighting that my portfolio is growing incredibly fast and I may need more than £30,000 a year in two decades’ time.

Of course, there’s no guaranteed way to build a portfolio, and I could always lose money. But if I follow these steps, I stand a good chance of turning my second income into my only income.

Friday 5 April VPC Specialty Lending Investments PLC

GM re capital return via B share scheme

The blog portfolio earned £3,139.00 in the first quarter.

The first estimate for the second quarter is a total of £5,120.00.

This years target is 9k, which if there aren’t any clangers hiding in the portfolio should be exceeded.

Thursday 4 April

Chelverton UK Dividend Trust PLC ex-dividend payment date
CT UK High Income Trust PLC – Class B ex-dividend payment date
Empiric Student Property PLC ex-dividend payment date
European Assets Trust PLC ex-dividend payment date
European Smaller Cos Trust PLC ex-dividend payment date
Finsbury Growth & Income Trust PLC ex-dividend payment date
Grit Real Estate Income Group Ltd ex-dividend payment date
Hammerson PLC ex-dividend payment date
Henderson High Income Trust PLC ex-dividend payment date
Invesco Asia Trust PLC ex-dividend payment date
Life Science REIT PLC ex-dividend payment date
Martin Currie Global Portfolio Trust PLC ex-dividend payment date
Real Estate Investors PLC ex-dividend payment date
RIT Capital Partners PLC ex-dividend payment date
Schroder Income Growth Fund PLC ex-dividend payment date
Shires Income PLC ex-dividend payment date
US Solar Fund PLC ex-dividend payment date

The Motley Fool

Turning my £20k savings into £20k a year in passive income

By Dr. James Fox

We’d all love to generate passive income, right? Naturally, it’s something of a privilege — the ability to earn money by doing almost nothing at all.

But to generate passive income, we’ve got to have a pot of money to invest. So what if I had £20k in cash, how could I use this to generate a life-changing amount passive income?

The starting point
Firstly, of course, I could look at getting a buy-to-let property and use that money as my deposit. But while it can be lucrative, being a landlord isn’t exactly ‘passive’. I’ve done that and the returns weren’t good enough, plus my money was locked away in property.

I prefer to invest in stocks. And I can do this simply by opening an account with a broker, such as Hargreaves Lansdown — it only takes minutes.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

If I invested £20,000 today, even in some of the largest yielding stocks on the FTSE 100, I’d only receive around £1,600 a year in passive income. That’s fine, but it’s clearly not a life-changing sum. I’m looking for £20k a year!

Instead, if I wanted to earn £20,000 a year from my initial investment, I’d need to practice something called compounding, or a compound returns strategy. This is essentially the process of reinvesting my returns every year.

By doing this, I’ll start earning interest on my interest. Thus the growth rate increases over time. So the longer I leave it, the faster it will grow.

Compounding
When it comes to compounding, we normally say that we should be investing in dividend stocks. For example, I could invest in a stock paying a 5% yield — which isn’t guaranteed — and then I would reinvest that dividend when it’s paid year after year.

But in reality, some businesses do the compounding for us. What I mean is, instead of paying a dividend to their shareholders, they continue to invest their profits in their business. Several US-based tech companies have done this, like Amazon and Apple — they’re now trillion-dollar companies.
But it’s easier to practice compounding with dividend stocks. After all, it means I have the power to reinvest my money, not some executive in San Fransisco. Plus, while dividends aren’t guaranteed, they’re more reliable than share price gains.

The power of reinvesting
Well, to generate £20,000 a year, I’m going to need at least £250,000. That’s because I could invest £250k in dividend stocks, like Legal & General with its 8% dividend yield.

So how do I get there? Let’s imagine I’m able to achieve low-double-digit annualised portfolio growth, say 11%. That’s slightly above the FTSE 250‘s average annual growth of 10.6% recorded between 1992 and 2022.

Assuming I can actualise an 11% growth rate, it would take me 23 years to turn my £20k into £250k. That might sound like a long period of time, but it would be worth it.

I can also help my portfolio growth by contributing more funds on a monthly basis. If I added just £200 a month, I could reach £250k in just 17 years.

Run your winners and cut your losses.

My portfolio crystalized losses.

EAT £3,652.00. The dividend yield was 6% based on the share price

and as the price fell the yield fell. A Trust I would buyback in a low

level interest environment.

UKCM £2,432.00 A badly timed trade, sold as other Trusts offered a higher yield.

BMD £1,365.00. A high yielding Trust sold to lower the overall portfolio risk/reward.