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Investing for passive income doesn't have to be difficult. A single investment can continue to generate wealth for life without lifting a finger.
The good news is that the ability to earn growing dividend income is within reach of the vast majority of savers.
In fact, I can generate a dividend stream of £54,159 simply by consistently investing £500 a month in a simple Vanguard exchange-traded fund (ETF). That is how.
The simple investment
He Vanguard FTSE 100 UCITS ETF (LSE:VUKE) tracks the FTSE 100The returns. So not only does it rise or fall when the index does, but it also distributes dividends to shareholders.
As of March 31, the 10 largest holdings were:
| Stock | % background |
|---|---|
| Shell | 8.60% |
| AstraZeneca | 7.95% |
| HSBC | 5.96% |
| Unilever | 4.97% |
| PA | 4.17% |
| GSK | 3.46% |
| CHILL OUT | 3.27% |
| Diageo | 3.26% |
| Rio Tinto | 2.75% |
| Glencore | 2.66% |
All of these stocks pay dividends. Some of its returns are quite modest (that of the data analysis company CHILL OUT is 1.78%), while others are much more substantial (HSBC yields 7.52%).
However, together, Footsie's payouts add up and give the ETF a dividend yield of 3.84%.
This is unlike the United States, where the indices are dominated by tech giants like Alphabet (nee Google) and amazon that have never paid dividends. The average performance of the S&P 500 It's a paltry 1.31%.
Dividend diversification
While dividends are not guaranteed, investors can benefit from broad exposure to the FTSE 100. Broad exposure reduces the impact of individual companies or entire sectors reducing their payouts.
For example, UK housebuilders have been cutting their dividends over the past year due to higher interest rates and a slowdown in the property market. However, offsetting this have been the banks, which have increased their own payouts after benefiting from higher interest income.
Another key strength of the UK blue-chip index is that it is truly global. In fact, more than 80% of FTSE 100 companies' sales now come from outside the UK, according to London Stock Exchange Group.
This diversification is an important feature of the ETF. Another is the low rates, with ongoing charges of only 0.09%.
Invest £500 per month
Over the past 10 years, the ETF has produced a cumulative return of 75% (share price increases and dividends).
Now this is perhaps one criticism I would have here. It follows the FTSE 100, which has long underperformed other major global indices in terms of share price returns. This poor performance could continue.
However, for the purposes of a solid, reliable income, no other index comes close.
So let's take that 7.5% per year as our average return. If I invest £500 each month and reinvest my dividends, this is how the value of the portfolio could increase.
| Period (years) | Portfolio value | Annual dividend income (reinvested) |
|---|---|---|
| 1 | £6,206 | £238 |
| 5 | £36,048 | £1,384 |
| 10 | £87,800 | £3,371 |
| fifteen | £162,097 | £6,224 |
| twenty | £268,759 | £10,320 |
| 25 | £421,887 | £16,200 |
| 30 | £641,722 | £24,642 |
| 35 | £957,324 | £36,761 |
| 40 | £1,410,410 | £54,159 |
Therefore, if you were to invest consistently in this ETF for 40 years, you could end up with an annual passive income worth just over £54,000 (not including platform fees).
In other words, you could stop reinvesting dividends and start spending them! Or simply enjoy the savings you had accumulated.
Of course, this is based on the fund's current 3.84% yield, which will actually fluctuate over this time. And inflation will mean that £54,000 won't have the same purchasing power in four decades as it does now.
However, this Vanguard ETF is arguably the easiest option to create a sizable future passive income stream. It requires virtually no effort.
