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If I want to invest in explosive growth companies that are changing the world, I turn to the US stock market. he is there Amazon, Tesla, NVIDIA, and the rest are listed. However, if my goal is to generate attractive levels of passive income, I’m looking no further than extremely cheap, high-yield UK shares.
Why UK Stock Market?
Simply put, I get more for my money (or pounds) in the UK when it comes to dividend yields. At around 4%, the average FTSE 100 The yield is more than double compared to S&P 500,
But this doesn’t tell the whole story. that it average, Open the bonnet and look more closely, and we may find a yield much higher than 4%. Here’s a quick snapshot.
legal and general
British American Tobacco
Now, the reason some yields are so high is because share prices have struggled. But that doesn’t mean businesses are floundering, far from it.
Indeed, these companies have been increasing their shareholder payouts for years, racking up higher yields in the process.
passive income generation
Right now, a quarter of FTSE 100 stocks yield more than 5%. This means that it is entirely possible to build a diversified portfolio yielding an average of 7.5%. This is more than you can get from any savings account, even if interest rates have gone higher.
So, I could invest £20k in an ISA right now and aim to achieve an annual passive income of £1,500.
However, if I reinvested my cash dividends for a few years instead of spending them, my £20k would more than double to around £41,220. And as a result the passive income potential will also double.
Of course, this is assuming stable share prices over that period, which is highly unlikely. After all, stock prices fluctuate even if the overall market moves up over time.
So even after dividends, which themselves are never guaranteed, I may still get less than I originally invested.
However, there is a way to reduce these risks.
magic of compounding
Rather than investing a lump sum, I might take a pound-cost-averaging approach. That is, I can invest regularly at set intervals, such as monthly. This would mean drip-feeding my £20k into shares over a 12 month period. This will remove the natural fluctuations of the market and provide mental peace.
Even better, I can commit to investing month-to-month, reinvesting all the dividends I receive along the way. Then, I’ll actually start harnessing the power of compound interest, which means earning interest on interest.
For example, if I invested £500 a month on top of my £20k, I would have around £221k after 15 years. This is assuming the same 7.5% return. And then I can expect to make £16,500 of annual passive income from this larger portfolio.
Of course, this compounding approach will require discipline as my total amounts pile up. After all, it can be very tempting to dip into my growing six-figure pot for a lavish vacation.
But as investment veteran Charlie Munger cautions: “The first rule of compounding is to never interrupt unnecessarily.,
The post No Passive Income? I would buy UK shares now to unlock the power of compound interest! appeared first on The Motley Fool UK.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of The Motley Fool’s board of directors. Ben McPoland has held positions at Legal & General Group PLC, Nvidia and Tesla. The Motley Fool UK recommends Amazon.com, British American Tobacco PLC, M&G PLC, Nvidia, and Tesla. The views expressed on the companies mentioned in this article are those of the author 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 wide variety of insights can make us better investors.
Motley Fool UK 2023