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Passive income is the ultimate goal for many investors. However, getting to the point where we can earn passive income from our investments can be more difficult. For example, if I had £15,000 in cash, I would have to accept that I wouldn't be able to generate life-changing passive income any time soon.
Rather, it takes time. It also requires us to make sound, growth-oriented investment decisions. And eventually, we will reach a position where we can move towards a dividend-focused portfolio and earn passive income.
Choosing winners
If you had invested exclusively in a FTSE 100 tracker over the last decade, I would have seen my portfolio grow around 5.4% annually. That's nothing innovative. This rate of growth would transform £15,000 into £25,700 over a 10-year period.
However, a carefully researched portfolio can perform much better. For example, Scottish Mortgage Investment Trust has achieved a growth of 308% in the last decade. The trust is famous for successfully selecting the next big winners.
But although I invest in Scottish Mortgage, I prefer to handpick most of my investments, selecting stocks based on their quantitative strengths and momentum. Basically, I'm looking for stocks with attractive price-earnings-growth (PEG) ratios, strong profit margins, a recent track record of beating earnings expectations, and share price momentum.
This strategy has led me to companies like AppLovin — I've risen more than 600% here in a year — celestial, NVIDIA, Rolls-Royceand Sterling infrastructure. And that's how we can deliver a portfolio that outperforms the market and keep our investments moving in the right direction. These are all actions that I continue to maintain.
So instead of earning 5.4% a year, I can earn much more by following a simple stock picking formula. In fact, looking at my daughter's junior ISA, which is just a year old, this strategy has generated 67.4% growth in invested assets.
Even at half this rate of growth, I could turn £15,000 into £200,000 in less than a decade, which in turn would allow me to generate a life-changing sum (around £16,000 a year) in passive income.
one to watch
A stock that meets many of my criteria right now is united airlines (NASDAQ:UAL). The stock is up 133% in the last 12 months and still trades at an attractive price of 8.7 times forward earnings, representing a 60% discount to the industrials sector.
Going forward, the company is expected to deliver modest earnings growth of 7.5% annually over the medium term. This could be helped by a Trump presidency with a proposal for lower corporate taxes and a promise to keep oil prices low (fuel typically accounts for 25% of operating costs).
The airline also recently posted a normalized result and analysts have vastly upgraded their expectations for the current quarter.
While Trump's presidency could see the opening of Russian airspace in the event of a ceasefire in Ukraine, the president-elect's domestic policies are largely considered inflationary. As such, I'm concerned that higher inflation will slow interest rate cuts and in turn this will mean less discretionary income for holidays and flights etc.
It's not a stock I'm diving into, but it's one that meets the criteria and looks like my big winners mentioned above. At least for now I will be following it closely.
