I plan to build a passive income portfolio with a sum of just £11.50 a week. This works out at roughly £600 a year, a relatively modest sum.
Unfortunately, £600 a year will not allow me to build a portfolio that will substitute my income from working overnight. It will take time to build a passive income portfolio that can generate enough income to supplement my living costs, so I need to be very patient.
I may even have to contribute extra funds in the years ahead, depending on how much I want to earn every year.
However, by starting with an annual investment of £600, or £11.50 a week, I believe I can build the foundations required to develop a large financial nest egg.
Passive income potential
To begin with, I am aiming to generate an annual return of 10% on my investment. I plan to achieve this by investing in a basket of high-quality income and growth stocks. Companies such as Unilever and Reckitt.
These are not the most exciting corporations on the market. Instead, they are slow and steady growth and income champions. And I would rather invest in these relatively predictable organisations than high-growth stocks.
While high-growth stocks could provide a better return on my money, there will always be a risk they could suffer a capital loss. Of course, this risk is still present with Unilever and Reckitt, but considering the size and stability of these businesses, the risk of a failure is significantly lower.
With an investment of £11.50 a week, or £50 a month, I calculate I may be able to build a nest egg worth approximately £100,000 after 30 years of saving and investing. That is assuming I achieve an annual return of 10%, which is not guaranteed, of course.
I can reduce the time it takes to hit this target by saving more. According to my calculations, increasing my contributions to £25 a week, or £1,300, would help me hit the target in 23 years.
And when I have hit my target, I can then switch to passive income generation.
From growth to income
According to my figures, with a £100,000 portfolio, I can generate an income of £8,000 a year. A handful of stocks in the FTSE 100 currently offer dividend yields of 8%, or more.
This is the strategy I plan to use to generate a passive income from dividend investments. One of the most significant risks of using this strategy is the fact that dividend income is never guaranteed.
Any one of the companies in my income portfolio could cut their payout, which would then reduce my annual income. In this scenario, I would have to revisit my portfolio holdings.
Still, it is a risk I am willing to take considering the potential for me to generate an annual income of £8,000 from my dividend investments.
Rupert Hargreaves owns Reckitt plc and Unilever. The Motley Fool UK has recommended Reckitt plc and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.