3 steps to aim for passive income heaven
Looking for a way to build up some long-term passive income? See what you think of this three-step path to getting started.
Step 1: Choose stocks and shares
Investing in the stock market won’t be for everyone — it depends on individual circumstances. But I see compelling reasons why we should at least consider it.
Analysts forecast a total dividend payout of £80.4bn from the FTSE 100 this year. That’s the rough equivalent of £1,160 for everyone in the United Kingdom. And it all goes into the pockets of the minority who own dividend shares.
FTSE 100 companies have also announced more than £40bn in share buybacks so far in 2025 — and it could go higher by the end of the year. That won’t give us cash directly, but it should boost per-share payouts in future years with fewer shares to split the cash.
In percentage terms, we’re looking at a forecast Footsie dividend yield of 3.5%. What about share price gains? We can’t predict that. But total FTSE 100 returns (share prices plus dividends) have averaged 6.9% a year over the past 20 years.
Step 2: Check the possibilities
Let’s look at the iShares Core FTSE 100 UCITS ETF (LSE: ISF). That’s an exchange-traded fund (which just means we can buy and sell it like any other stock). And its aim is to track the FTSE 100. Yes, that means with a single investment we can bag a stake in every company listed on the top London index.
There’s a standing charge of less than 0.1% a year. So let’s assume the Footise continues its past performance — not guaranteed, but I think we’re fine for ‘What if?’ purposes — and our tracker fund generates 6.8% a year.
The Stocks and Shares ISA allowance currently stands at £20,000 a year. Someone who can afford to invest that much every year could end with a pot of £830,000 after 20 years — more than double what that put in. And just an extra 10 years could more than double that to £1.8m — that’s how the effect of compounding can accelerate.
This assumes the FTSE 100 and the iShares Core FTSE 100 continue their past performance, which can’t be guaranteed — but there’s more than a century of outstanding stock market history behind it.
Step 3: Put up the cash
Opening a Stocks and Shares ISA is pretty straightforward. And then we’re left with seeing how much we can actually invest — few can manage the full £20k. But even someone who can invest £5,000 a year could still end up with more than £470,000 in 30 years at these rates.
I must end on a caution. Even a tracker faces overall stock market risk — like the 2020 crash. But the market tends to recover fairly quickly. And the iShares Core FTSE 100 is managed by a single company — and things can go wrong with even the best of them.
But I think it’s a great one to consider for starting a new ISA. And I’ve branched out into investment trusts myself. They still spread our cash, just targeting a specific goal — like dividends — rather than the whole index. And the longer we can invest the more we should even out the risk.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
