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.

If u have made good profits from your investments and don’t want to

lose them, a dividend re-investment scheme is one way of preserving wealth.

Better if u can add oxygen to the fire by investing regulary.

If u are starting with little capital, below is how I built my share portfolio by buying and holding, taking profits and re-investing into new positions whilst always re-investing the dividends.

I have now moved on to a high dividend strategy as I’ve already achieved

my plan for my own portfolio.

I no longer hold any of the above but would buy back selected Trusts the

next time the market crashes.

Can I simply just say what a comfort to discover an individual who truly knows what they’re talking about on the net.
You certainly realize how to bring a problem to light
and make it important. More and more people have to look at this and understand this side of your story.

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Best to DYOR but as always timing then time in is more important

than just time in. The further the Trust is trading from a recent low

the higher the risk of the trade.

Why lifestyling could be your worst decision if u want a comfortable retirement.

The Motley Fool

£20,000 in savings? I’d try to turn that into £29,685 of passive income each year
By James Beard

Passive income is earned by doing very little. But as appealing as it might sound to earn lots of it, there’s a bit of patience needed. Let me explain.

For the purposes of this exercise, I’m going to assume I have savings of £20,000 available to invest. This is the amount that can be invested each year in a Stocks and Shares ISA.

As a risk-averse investor, I’d be uncomfortable concentrating all of my funds in a single stock. I know that if I bought the ‘correct’ one, I could make a lot of money. But with an estimated 60,000 listed companies in the world, there’s a good chance I’d choose unwisely.

One way of potentially overcoming the problem of picking winners is to buy shares in an investment trust. Although I’d hold a single investment, my risk’s spread across the many stocks the trust owns. My exposure isn’t then limited to one particular industry, index, or country.
What to buy?
With this in mind, I’d use my hypothetical £20,000 to buy shares in Allianz Technology Trust (LSE:ATT). Although not guaranteed, I believe technology stocks are likely to out-perform the wider market.

I like the fact that the trust isn’t just focused on artificial intelligence (AI). Although I believe AI’s going to revolutionise our lives, I think it’s a little too early to identify which particular aspect of the technology is going to be the most profitable.

As its name suggests, ATT has a wider remit and invests in all parts of the tech sector. Having said that, its biggest holding (9.9% of total assets at 29 February 2024) is Nvidia, whose semiconductors are used in many AI applications.

Its next four biggest stakes are in Microsoft (8.1%), Meta Platforms (6%), Apple (6%) and Broadcom (4.2%).

Another positive is that it invests only in quoted companies. Its more famous peer, Scottish Mortgage Investment Trust, owns some of the “world’s most exceptional growth companies”. But many of them aren’t listed, which means valuing them accurately can be difficult.

Although it hasn’t performed as well as the Dow Jones World Technology Index, its cumulative five-year return of 139.4%’s impressive.

Also, the fund currently trades at a discount of approximately 10% to its net asset value, which implies the stock’s undervalued.

But tech stocks can be volatile. And when the dotcom bubble burst, we saw how quickly things can go spectacularly wrong.

However, for the purposes of this hypothetical exercise, I’m going to assume that the trust’s share price increases by 17.4% a year. This is equal to its compound annual growth rate during the five years ended 22 March.

Of course, there’s no guarantee history will be repeated. But if I could achieve this growth rate, after 20 years, my initial stake would be worth £494,757.

I could then sell up and buy some dividend stocks. Assuming an average yield of 6% — again, not guaranteed — I’d be able to generate an impressive income stream of £29,685 a year, with minimum effort.

That’s why I believe patience is the superpower of the wise.

£££££££££££££

Anyone with more time in the market before u need the income for retirement could include a percentage of higher risk Trusts in their portfolio.

ATT or PCT

Only trading back at their 2021 price, since the start of this year.

There are only two.

Buy Investment Trusts that pay a dividend and re-invest those dividends to buy more Investment Trusts that pay a dividend.

Any Trust that drastically changes their dividend policy must be sold, even at a loss.

All blog purchases include a charge of ten pounds and a sale of five pounds.

(AJ Bell recent change to charges)

Stick to your plan thru thick and thin, there will be plenty of thin.

The current plan is to have a Snowball of between 14-16k after ten years,

those lucky enough to have longer before they retire can expect a bigger Snowball.

The plan’s fcast is based on the calendar year, where the current fcast is 8k and a target of 9k. (2023 £9.422,00)

Using the current tax year, which is a snapshot of the last 12 months

the figure will be £11,072.00. Well ahead of the target in the plan but it’s too early in the year to change the fcast.

An comparable annuity would be 7k and u would have to donate all your

capital to a pension provider.

Income earned this year £3,139.00, do not scale by 4 to arrive at figure

for the year.

Plan for the next generation
Leaving an inheritance is a major consideration for most investors in their 80s, says Mr Khalaf. “If you’re investing for an inheritance, you can probably afford to take a more growth-orientated approach,” he says.

Assets to be passed on as a bequest do not necessarily need to be liquidated – they could instead be treated as a longer-term investment for those who inherit them. However, older investors should also ensure they have a steady income source, Mr Khalaf says.

This is particularly important to meet the cost of any health or care needs that may arise. Making gifts to children or grandchildren within seven years of death may trigger inheritance tax, but there are some exceptions.

Ms Guy suggests making gifts of £5,000 to children getting married (or £2,500 to grandchildren getting married). Both would be exempt from IHT. Gifts of £3,000 each tax year are also permitted.

DIY – if you feel confident
After working with “perfectly nice” financial advisers from major firms, Mr Pannett decided to go solo at the age of 40. “I don’t think we need to pay for advice when we’re quite capable of sorting things out ourselves and I much prefer doing it myself,” he says.

Mr Young agrees, although he cautions that doing so means taking on a “certain level of personal responsibility”. “The truth of the matter is I really resent paying the fees [for professional management],” he says.

He points out that if advisers take fees out of capital, any income the investor receives from their investments is being undermined. “You virtually have to do it yourself. Otherwise you’re not gaining anything,” he says.

Ms Guy says many people are already comfortable making their own investment decisions. She adds: “It’s important to do your own research and understand your own risk level as the right type of investments will be different for everyone.”

Some prefer a mixture of different funds and shares while others are happy with a simple stock marker tracker fund, she adds.

Lord Lee, who bought his first share, in a shipping company, in 1958 at the age of 15, says common sense and patience are needed.

“Apart from a little money and time, that’s all you need,” he says. “Patience is the most important thing, and that’s what most people haven’t got.

“I do understand that most people aren’t terribly interested, and are happy to pass investment decisions on to others, but it’s more expensive over time. I believe that most people can and should handle their own affairs.”

£££££££££££££££

If u want to leave a legacy, an IT re-investment plan may be suitable for u,

as u can’t sell the Trusts in the portfolio (unless an unexpected event happens) as your plan is to use the dividends to pay for your retirement.

The sooner u start to re-invest the larger your Snowball will be.

Why long-term investing works

Investing over a long period is a tried and tested strategy.

The sooner you start saving the more you can put aside, and early contributions are the most valuable because they have the longest to grow.

Compounding will also boost returns. In simple terms, your money earns a return in the first year and both the original cash and the return benefit from any growth in the second year. In the third year your investment is further enhanced by any returns achieved. This snowball effect is known as compounding.