Stock market

£5K in savings? Here’s how I’ll turn that into £11,438 of annual passive income!

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My main reason for investing in UK shares is to create a passive income stream for me to enjoy when I retire.

Let me explain how I want to do this, along with an example of a dividend stock I would buy to help me achieve my goal.

Method and Mathematics

First things first, let’s say I have £5K in savings right now. Also, I would like to add £200 a month from my wages to top up my pot.

I need to make sure I’m working hard for my money, and paying the least amount of tax, so I can enjoy my earnings. A stocks and shares ISA is perfect for me, as I don’t have to pay any tax on dividends.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor is it intended to be, any form of tax advice. Readers are responsible for conducting their own due diligence and seeking professional advice before making any investment decisions.

Next, I need to find between 5 and 10 quality stocks with good fundamentals, future prospects, and reasonable rates of return.

Crunching some numbers with an initial £5K, and adding £200 per month, I’m going to invest for 25 years, and aim for a 7% rate of return.

After this period, I will be left with £190,641. To enjoy this, I’m going to put down 6% a year, which equates to £11,438.

At this stage in my life, I will have paid off my mortgage and my children are no longer dependent on ‘mommy’s side’, so this is a good vessel for me to use as I please.

Of course, there are some risks in this plan. The biggest problem is that profits are never guaranteed. Also, although I aim for 7%, the final payout may be lower because stocks come with risks that can hurt returns. Alternatively, it could be higher, leaving me with more money.

Asset manager

FTSE 100 Wealth Manager Schroders (LSE: SDR ) is a stock I like for a few key reasons.

First, it’s worth noting that Schroders’ share price has been under economic pressure recently. Shares are down 14% over the 12-month period from 458p at this time last year, to a current level of 390p.

I am not interested in this price reduction. In fact, it makes the shares more attractive at a forward price-to-earnings ratio of 12.

Next, the dividend yield of 5.4% is attractive. This is well above the FTSE 100 average of just under 4%.

Furthermore, Schroders is an established business. With assets under management worth more than £750bn, according to recent figures, the business is huge. Also, the firm has been around for over 200 years. It’s fair to say it knows a thing or two about navigating tough economic conditions, making money and rewarding investors.

Despite the bullish characteristics I am attracted to, I am concerned about inconsistent inflows in recent years, which have been linked to low investor confidence. This is mainly due to the recent economic downturn. With fewer assets it can be difficult to manage, make money, and reward investors. This is something I will keep a close eye on.

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