How big does my portfolio need to be to make £2.5k of monthly passive income?
If I had a passive income stream of £2,500 a month, it would easily cover all my bills. Even though I’m a hard worker, if I could reach the stage of earning that level of income from the stock market, it would allow me to take my foot off the pedal regarding work. Yet is it realistic to think that stocks could provide such a high level of cash flow? Here’s what I found out.
Estimating potential returns
Before I can determine the ideal size of my portfolio, I need to figure out what kind of yield I can expect from the stock market. There are two primary ways to generate income. The most popular is collecting dividends paid out from a company’s earnings. Another way is to buy growth shares and sell portions of the stock over time, to bank some of the (potential) capital appreciation.
The average FTSE 100 dividend yield is 3.28%. However, there are 14 stocks with a yield exceeding 5.5%. When I consider options in the FTSE 250 as well, I’m pretty confident in building a portfolio with an average yield of 7%. As for growth stocks, the pace of share price appreciation is a lot more subjective. Popular shares like Tesla (57%), Nvidia (61%) and Amazon (27%) have all performed well in the last year, with the percentage gains shown in brackets. Yet over the long run, I’d say a 10%-12% annualised growth rate is more reasonable.
So, if I invested 50% in dividend shares and 50% in growth stocks, my average yield could be around 9% (although there’s no guarantee I could achieve that). Therefore, to make £2,500 a month, I’d need to have a pot worth £333,333.
This is a lot of money, so investing it all in one go is unlikely. An alternative way to build up to this level could be to invest £500 a month, compounding gains for 19 years. After this point, an investor could then look to enjoy the income. But again, some investors will achieve lower returns.
A high-yield option
When looking for potential dividend stocks, I like GCP Infrastructure Investments (LSE:GCP). It’s a UK-listed investment trust that provides debt financing to UK infrastructure projects. GCP generates returns by earning interest on the loans. Over the past year, the share price is down by 7%, with a current dividend yield of 9.58%.
There are several reasons why I believe it could be a good dividend stock. The public sector often backs the projects, so the income streams are relatively secure compared to more cyclical sectors. The trust also benefits from inflation-linked revenues in some cases, meaning income rises in line with price growth. Further, the portfolio is well diversified across sectors and projects, which spreads risk associated with any one deal.
Putting all of this together, it means that a consistent and sustainable dividend can be paid. The company has been paying out income consistently for over a decade. I believe this trend can continue in the years to come.
Granted, the business is exposed to changes in government policy. If it cuts spending in areas like renewable energy or housing, GCP could suffer as a result.
Yet even with this risk, I’m considering buying the stock to help boost the income side of my portfolio.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon, Nvidia, and Tesla. 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.
