Investing in the stock market can be an excellent means of passive income. And I think it’s possible to turn £20 a week into £4,500 in annual income.
This includes a target for a 6% annual return over a 30-year period. In my opinion, this can be achieved with some careful investment and patience.
There are two parts to my passive income strategy. The first part is finding the right stocks to buy and the second is buying them at the right time.
Stocks to buy
Finding stocks to buy can be difficult – there are many traps to avoid. Fortunately, by following some basic principles, it is possible for investors like me to avoid most of them.
The most important thing for me is to find investments that will be able to generate passive income 30 years from now. This means they need to be durable.
Generally, it includes something that allows the company to fend off competition over time. This can come from a variety of sources, but some are more obvious than others.
UnileverFor example, there are some important advantages. Its huge scale allows it to keep its production costs low and its strong brands allow it to maintain strong margins.
It’s also important to stick to companies I understand. In order to assess whether a stock will be a good investment 30 years from now, I need to be able to understand it in some detail.
Rule like that stock British American Tobacco for me Despite its attractive dividend yield, the outlook for Smoke is too unpredictable to invest.
when to buy
Another part of my plan involves buying shares at the right time. Even if I can find the right companies to invest in, buying them at the wrong time will likely result in poor returns.
move right, for example, currently pays 8.5p in dividends per share. Whether that’s a good return depends on how much someone paid for the stock.
For an investor buying the stock at the end of 2021, that’s a yield of about 1%. But anyone who bought Rightmove shares in October 2022 will get a 2% return.
Buying at the right time is not about acting when stocks are at their lowest point. In fact, it is impossible to know when a stock will still fall.
Instead, it comes down to buying shares when they are trading below their intrinsic value. This often happens when there is some kind of negative sentiment around the company.
As long as I stick to buying shares below their value, I should be able to make good returns over time. And it is true that stock prices will go up or down in the near future.
Getting it right
The two parts of the plan are related. The key to both is to focus on companies I can understand.
If a company is outside my circle of competence, I will not be able to understand its competitive advantages. I would not even be able to judge its value accurately.
With business I understand, though, things are different. I am able to make the kind of decisions that will allow me to earn a lifetime of passive income with weekly investments.
The post How I invest £20 a week to earn passive income for life appeared first on Motley Fool UK.
Further reading
Stephen Wright has positions in Rightmove plc and Unilever plc. The Motley Fool UK recommends British American Tobacco Plc, Rightmove Plc, and Unilever Plc. 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 on our membership services such as Share Advisor, Hidden Winner and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023