Passive income of £140,000

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The Motley Fool

How I’d invest £200 a month to aim for a passive income of £140,000 a year
Story by Oliver Rodzianko

Warren Buffett has figured out a slow, stable path to riches. By compounding his portfolio’s returns over many years, his company is now worth nearly $1trn. Following in his footsteps, I want to see if it’s possible to build a passive income of £140,000 starting from zero.

A lifelong journey

It’s worth remembering that the earlier I start and commit to my goal of investing with discipline, the larger my final portfolio value will be.

50 years might seem like a long time, but starting with just £200 and adding just as much every month could give me a total interest earned of nearly £3.4m if I achieve a 10% annual return. I consider that annual growth to be achievable because that’s the average annual total return of the S&P 500 from 1926 through 2022.

My strategy requires me to reinvest all of my dividends. Only when I hit my goal of £3.5m will I start spending these payouts. After all, it’s worth the wait for an annual 4% retirement dividend yield of £140k

However, investments can rise and fall, and I have to be careful which shares I choose. A failure to build a well-diversified portfolio or to choose companies that appreciate over time could leave me with much lower returns than I forecast.

How I choose investments

One of my top-performing picks of recent years has been Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG).Since I first bought the shares just a year-and-a-half ago, they’ve returned approximately 35%.

This investment is perfect for the earlier growth stage of my portfolio. However, with a dividend yield of just 0.25%,the company isn’t going to provide the lion’s share of my residual income in retirement. Instead, it’s the type of business I think will help me get to £3.5m faster.

However, Alphabet is known as one of the more stable technology companies in the magnificent seven. The company is a core holding of mine due to its more consistent results compared to its peers like Tesla and Amazon:

How I’d invest £200 a month to aim for a passive income of £140,000 a year, when I get older, I’ll get slower

One of the top REITs I know of is Realty Income. Investors famously call it the ‘monthly dividend company’ for its regular payouts. It has an annual dividend yield of 5%. Furthermore, over the past 10 years, the share price has increased by a healthy 53%.

A mixed and evolving strategy

By mixing a heavy emphasis on growth in my earlier years and prioritising income in my later years, I think I can succeed with my dream of an abundant retirement.

It may take some time, but I have plenty of that. While I’ll be careful of the risks, I’m committed to investing well. Right now, I’m focusing on companies like Alphabet rather than Realty Income.