Top tips for a lifetime of passive income investment

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I’m investing with the aim of generating a nice passive income stream to boost my retirement cash. And today, I want to share some of my favourite tips I’ve picked up along the way.

#1. Shares beat other investments

The folks at Barclays have been studying long-term UK investment returns stretching back more than 120 years. They’ve compared returns from UK shares, from gilts, and from cash savings. The inescapable conclusion is that, over that lengthy period, shares have wiped the floor with those other forms of investment.

The investigators examined rolling periods of five years, 10 years, and so on. And they found that the longer the periods, the greater was the chance of shares coming out on top.

#2. Compound returns generate greater wealth

The quote “Compound interest is the eighth wonder of the world” is often attributed to Albert Einstein. He probably didn’t say it, but whoever did was also smart.

Suppose an investor plonks down £10,000 on shares that generate an annual dividend yield of 5%. In 20 years, they’ll have added an extra £10,000 to their stash. But if, instead, they reinvested the cash in more of the same shares, they’d instead add £16,500.

And over 40 years, their simple £20,000 in dividend cash would generate a total £30,000. But reinvested, their pot would grow to £70,400.

#3. Stick with a strategy

Fancy some small-cap growth shares this year? Maybe high-tech startups in the cyber world? Or the emerging clean energy and battery technology market?

Some investors, like me, prefer to seek out mature companies paying reliable dividends, and hold on to those for the long term.

We can generate healthy passive income from a number of different investing strategies. But very few investors can master more than one. That’s why I chose a strategy I understand well, and I’m sticking with it.

#4. Spread the risk

Some people are horrified when I tell them I put all my investment cash into shares on the UK stock market. I think they picture me losing everything and leaping out of a tall building, like investors were said to have done after the great crash of 1929.

But I spread my investments across a variety of industries. What are the chances of the banks, supermarkets, retailers, industrial, and technology companies all going bust together? If that happens, we’ll have a lot more to worry about than our retirement prospects.

#5. Buy investment trusts

Investment trusts help me pursue my strategy, while providing diversification.

I pick from the Association of Investment Companies’ list of Dividend Heroes, which have all raised their annual dividends for at least 20 years in a row. They all have specific strategies I can choose from, be it UK equity income, global investments, or whatever.

Yes, there’s stock market risk, as there is with anything else. But I rate investment trusts as the closest I can get to a ‘buy and forget’ investment with minimum fuss and minimum stress.

The post Top tips for a lifetime of passive income investment appeared first on The Motley Fool UK.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.