Want to try and turn £5,000 of savings into a £1,068+ monthly passive income? Here’s how
Thanks to the power of the stock market, itâs never been easier to transform savings into a passive income stream. There are hundreds of dividend-paying companies for investors to choose from, some of which are on track to generate a treasure trove of wealth for long-term thinkers.
The best part? It doesnât take all that much money to get the ball rolling. A few hundred pounds is all thatâs needed to kick-start an investment portfolio.
But those with £5,000 sat in the bank, the wealth-building journey can be supercharged. And over the long run, this relatively modest lump sum can be transformed into a £12,814 passive income stream. Hereâs how.
Investing in dividend shares
The London Stock Exchange is the envy of the world when it comes to dividends. The UK’s home to some of the most generous payout policies, making it the perfect hunting ground for income-focused portfolios.
Right now, the FTSE 100 offers a 3.1% yield, meaning a £5,000 lump sum investment will instantly unlock a £155 passive income.
But in the stock market, dividends can grow over time. And when these payouts are reinvested, it creates a compounding snowball effect. Throw in capital gains, and the average return for index investors has been closer to 8% over long periods.
Thatâs enough to transform £5,000 into £121,366 in roughly 40 years. And even if the portfolio yield remains stubbornly low at 3.1%, thatâs enough to generate a £3,762 annual passive income, or £313 on a monthly basis.
Aiming higher
Rather than relying on index funds, investors can buy shares of individual dividend stocks instead. This obviously involves taking on more risk and requires a lot more attention to detail. But it also opens the door to far more attractive yields.
Aviva (LSE:AV.) shareholders have experienced this firsthand. Including dividends, over the last decade, the insurance giant has generated a total average annualised return of 9.3%.
An extra 1.3% might seem trivial. But over 40 years, itâs enough to turn £5,000 into £203,384 — £82,018 more. And with a 6.3% yield, the subsequently passive income is closer to £12,814, or £1,068 on a monthly basis. And thatâs before factoring in long-term yield expansion.
Is Aviva worth considering today?
Sadly, thereâs no guarantee Avivaâs past performance will continue into the future. Therefore, 40 years from now, investors could end up with less than expected. Of course, the opposites also true.
With the company actively implementing AI to improve its underwriting efficiency, management is already delivering improved operating leverage, expanding profit margins and dividends in the process. And with the recent acquisition of Direct Line, broadening the firmâs addressable market, Avivaâs long-term run is quite encouraging.
The groupâs domestic concentration in the UK reduces geographic diversification and increases the firmâs sensitivity to Britainâs economic cycles and regulatory shifts. But so far, the company has a solid track record of navigating this environment as a steady compounder.
Thatâs why, for long-term passive income investors, Aviva shares could be worth a deeper investigation. And itâs not the only income stock Iâve got my eye onâ¦
The post Want to try and turn £5,000 of savings into a £1,068+ monthly passive income? Hereâs how appeared first on The Motley Fool UK.
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Zaven Boyrazian 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.
