Stock market

With £11,000 in savings, here’s how I’d aim for £9,600 a year in passive income

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The average UK adult has around £11,000 in savings. Well, it was in January, according to Financial Monthly. I think this can be a great start to building long-term passive income.

I won’t be speculating on rare metals, buying peanut futures, or picking up any weird and wonderful ideas out there.

No, there is only one way for me. I invested my money in Quality UK shares. And I reinvest all dividend income, so that gives me an extra boost.

10% annual profit?

Imagine a stock that returns an average of 10% per year, with 5% share price appreciation and 5% dividends.

If I invest £11,000 in it, I can currently get £550 a year in dividends. And what’s left could almost triple to £29,000 over 20 years.

But if I buy new shares with the proceeds, my pot could grow to £74,000. And then 5% in profits from that could give me £3,700 in passive income every year.

And with a 30-year horizon someone could make £192,000, and then collect £9,600 in annual dividend income.

Stocks and Shares ISA withdrawals

Am I being a bit optimistic here with a 10% total return? Probably. But over the past 10 years, the average stocks and shares ISA has returned 9.64% per year. And a handful FTSE 100 The stock is predicted to pay more than 8% in dividends alone.

Let’s take an example, Legal and General (LSE: LGEN). The dividend yield is forecast at 8.2%. And they also show a forward price-to-earnings (P/E) ratio of 11, falling to less than nine by 2026.

Insurance stock prices may go up and down, but at least I don’t think that valuations make the shares overvalued.

Return of Dividends.

On dividends alone, £11,000 in Legal and General Shares today could grow to £53,000 in 20 years or £117,000 in 30 years. And doesn’t this show that we can keep our money as long as we can? Even a few more years can make a big difference.

This assumes that profits and share prices do not change, which is unlikely. But even so, we could end up with £9,600 a year in passive income again.

It’s just one stock, and it’s been volatile in the past. And in today’s economy, I’d say any company like that in the financial sector might be riskier than usual right now.

So, diversity is essential in my book. But that doesn’t mean I have to compromise my goals.

Superior FTSE 250 returns

If we look at short stocks FTSE 250, we still see a lot of quality companies. And the index is also home to some great investment trusts, which can further boost diversification.

In fact, the FTSE 250 as a whole has averaged 11% a year.

So, I think a mix of high quality FTSE 100 and FTSE 250 stocks is the way I will save £11,000. And I will keep saving too.


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