I firmly believe that investing in stocks and shares is one of the easiest ways to generate a passive income for life. I also think it is possible to start building a passive income stream with an investment of just £10,000.
With that in mind, here is the strategy I would use to invest a lump sum in equities today with the goal of generating income for life.
Generating a passive income
Buying equities for dividend income is a very straightforward way to generate a passive income stream. However, the strategy does come with some downsides.
Dividend income is paid out of profits. Therefore, if a company’s profitability suddenly declines, it may not be able to pay out as much income to shareholders as in previous years. Therefore, investors need to be prepared for a sudden dividend cut if an operating environment changes significantly.
I will be keeping an eye on this when it comes to all of the companies outlined below. These corporations might look like attractive dividend investments, but their prospects could change suddenly if the operating environment deteriorates.
Even after taking these risks into account, I am still convinced that equities are one of the best passive income assets to own.
Rather than focusing on the highest yielding stocks on the market, I would buy a mix of higher and lower yielding equities from my portfolio.
I think this could open the door to more capital growth as companies that are not paying out all of their profits to investors tend to invest more in their respective businesses.
This can lead to faster earnings growth rates in the long run.
This is why I would acquire pharmaceutical companies AstraZeneca and Hikma for my portfolio today. The latter yields just under 2%, while the former yields around 2.5%.
These are not the highest yields on the market. Still, both organisations are also investing significantly in developing their drugs pipelines. I think this should help underpin earnings growth and potentially dividend growth in the years ahead.
Both companies may have to overcome challenges, including competitive forces and regulatory factors, which could weigh on growth.
At the other end of the dividend spectrum, I would also look to acquire Direct Line and home builder Persimmon for my passive income portfolio. The former supports a dividend yield of around 8%, while the latter yields around 9%.
These companies have a fantastic track record of returning lots of cash to investors. Their near double-digit dividend yields stand testament to these qualities. They also have strong balance sheets, which are stuffed full of cash. This should help support their dividend policies in the years ahead.
Still, their dividend credentials are far from guaranteed. A sudden drop in profitability could hit either outfit at a moment’s notice. In this scenario, they would have to reconsider their payouts.
That is why I would combine both lower-yielding and higher-yielding stocks in my passive income portfolio.
Buying the four companies outlined above would yield around 4% on my £10,000 lump sum. That could generate a passive income of about £400 a year for life.
I could then build this income stream by steadily depositing more into my investment account and acquiring a higher number of shares in the firm’s outlined above.
The post How I’d invest £10k to create a passive income for life appeared first on The Motley Fool UK.
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Rupert Hargreaves owns Direct Line Insurance. The Motley Fool UK has recommended Hikma Pharmaceuticals. 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.