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My investing goal is to build up some passive income for when I retire. I’ve been working towards it for some years now.
But how would I start in today’s tough times?
After a few years of soaring inflation and high interest rates, I have a fair bit less cash to spare each month.
But low Stocks and Shares ISA charges mean we really don’t need to be rich to invest in shares. And it’s suprising how much £100 per month, or even just £50, could grow in the long term.
To many, that’s the cost of a night out. But I don’t waste money on nights out.
Favourite stocks
The hardest thing for me is picking the next stock to buy. There are just so many on the FTSE 100 these days paying good dividends and on low valuations.
That’s actually good, as it makes it easier to build a diversified ISA and reduce the overall risk. But as an illustration, I’ll use one of my long-term holdings, Aviva (LSE: AV.)
The first thing to notice is that the share price has been volatile, as we can see from this chart:
Look at those dividends
The second thing to note about Aviva is that it has a forecast dividend yield of 7.5%. That’s big, and analysts think the earnings will be there to cover it over the next few years.
The worst thing about a dividend is that there’s no guarantee, and it can be the first thing to be cut in hard times.
The insurance sector can be cyclical too, and I don’t expect Aviva to be just smooth sailing in the coming decades.
But it’s a sector that has thrown off lots of cash over the years. And the longer I hold, the smoother I expect the overall result to be. I also buy shares in other sectors to offset the risk.
Compound magic
I wouldn’t put just £100 into shares in one go, as the transaction costs would eat into that too much. But if I save it in my ISA I could soon build up, say, £1,000 to invest.
After a year, I could add £75 in dividends to the pot for every £1,000 in Aviva shares. In reality, I’d buy something different each time, but I’ll stick with the 7.5% dividend to simplify the sums.
If I keep doing it, and reinvesting my dividend cash each year, things should build up nicely thanks to the power of compounding.
After five years, I could have £31,393 in my pot. Give it 10 years, and I could reach £76,462. And just 15 years could be enough to get me to £141,163. A 7.5% dividend on that amount would produce passive income of £10,587 per year.
Just dividends
This is just from dividends, with no share price gains. However, it is based just on one snapshot right now. And I expect ups and downs from Aviva over the long term.
It’s just an illustration. But as part of a diversified portfolio, I’d expect to beat the pants off a Cash ISA in 20 years.
