How investors might try to turn £10,000 into a chunky passive income

I often find myself day dreaming about building a chunky passive income. The urge to escape the 9 to 5 by establishing a sizeable alternative source of income is a strong one.

The hard part is figuring out where to start. Now, I’m not fortunate enough to be sitting on a spare £10,000 in cash. However, other investors out there may be.

Here’s how they could try to turn that into a sizeable passive income by investing in a handful of top UK stocks.

Building a chunky passive income

With some cash in the bank, the first question is where to invest that for the future. There is a long list of FTSE 100 stocks that pay solid dividends and could potentially provide a passive income stream.

Compared to growth shares that tend to reinvest in the business rather than distribute profits to shareholders, dividend stocks can provide a regular source of additional income. If investors reinvest those dividends rather than pocket the funds, the magic of compounding returns can really turbo charge portfolio growth.

There are many companies that have high dividend yields right now. Rio Tinto (LSE: RIO) and Legal & General (LSE: LGEN) are a couple that spring to mind.

Rio Tinto is a global mining giant that is yielding 6.7% right now, while Legal & General is one of the largest UK financial services and asset management companies, with an 8.7% yield.

An equally weighted portfolio of these two Footsie stocks would therefore have a 7.7% yield. That’s pretty handy if it holds up in the long run.

Let’s dive into the maths. A day one portfolio of £10,000 really isn’t going to deliver enough as a sustainable income stream. However, let’s fast-forward a decade and see what could happen.

With reinvested dividends, that portfolio could be worth £21,500 in 10 years time. After 20 years, that 7.7% dividend yield would help propel the portfolio to over £45,000.

What if an investor also invested £500 every six months on top of that initial lump sum? That £10,000 portfolio could be worth over £200,000 and throwing off nearly £8,000 in annual dividends by year 30. Assuming no share price movements, that is a pretty handy second income.

Choosing the right stocks

Now, this is all easier said than done. Share prices do move and dividend yields change, so I personally think diversification and a long-term perspective are essential.

Rio Tinto is one Footsie stock that investors could consider buying. The global mining giant has a market cap of £84bn with a 6.9% dividend yield right now. I have been watching it lately, and even assuming no change in share price, I think that it could be a very handy little earner on the side.

There are some complexities around the stock. A dual-listing structure in Australia and recent controversial mining practices have created some question marks for investors.

However, the company is a global leader in mining key minerals that are required for the energy transition over the coming decades.

The post How investors might try to turn £10,000 into a chunky passive income appeared first on The Motley Fool UK.

More reading

• A 6.7% yield but down 14%! Is it time for me to buy more of this FTSE passive income gem after it upgrades strategic targets?
• A cheap FTSE 100 share to consider buying for the next 10 years!
• A 7% dividend yield but down 16%! Is this mining giant a no-brainer?
• With P/E ratios of 7.2 and 9, I think these FTSE 100 shares are bargains!
• Here’s a simple 5-stock passive income portfolio with an 8.7% yield

Ken Hall 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.

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