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With an initial lump sum of £20,000 and regular monthly savings of £242, I think FTSE 100 could help me generate a healthy level of passive income for my retirement.
The index houses shares of many renowned companies with strong balance sheets and well-known brands.
But there are no guarantees when it comes to investing. stocks can go up or down. However, history suggests that a well-balanced portfolio can generate long-term growth and impressive passive income.
Impact zone
Personally, if I were to start my investing journey again, I would use a stocks and shares ISA because all the income and gains it contains are tax-free.
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any type of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
If possible, I would also look to invest monthly. Saving a small amount frequently can help increase profitability in the long run.
The latest figures from the Office for National Statistics reveal that the average UK household has an annual disposable income of £32,300 and saves approximately 9% (£242 a month).
I would use this sum to buy more shares in the UK's largest companies.
However, it would only be possible to start adding to my ISA in the second year, as there is an annual limit of £20,000 on the amount that can be invested.
Identify winners and losers
In my opinion, it is essential to do a little research before deciding which stocks to buy.
Initially, my goal would be to buy half a dozen or so. Too few and any weak performance will seriously hurt returns. Too many and it will be difficult to keep track of things.
Before investing, I like to check annual reports and business updates to identify potential warning signs. Additionally, I use some popular valuation metrics to evaluate whether a stock is fairly valued. I also take into account the recommendations of the brokers, although I do not slavishly follow their opinions.
A possible option
One FTSE 100 share I have in my ISA is HSBC (LSE:HSBA).
Analysts expect earnings per share of 98p-100p in 2024, 2025 and 2026. Therefore, the bank's shares currently trade at a multiple of around seven times forward earnings. This is comfortably below the FTSE 100 average of 10.65. And it is also lower than the bank's average for the 2018-2023 period of 12.9.
Of the 17 brokers covering the stock, nine say “buy”, six are neutral and two advise their clients to sell.
However, as much as I am a fan of the bank, I am concerned about its exposure to China's real estate market. The risk of loan default appears to be increasing. The sector is also holding back growth in the broader economy, on which HSBC relies heavily.
Others seem concerned about the sudden retirement of its chief executive, Noel Quinn. But his total compensation package was $10.64 million in 2023, so I can understand his decision!
Despite these risks, I believe the bank could help me achieve my goal of at least matching the long-term growth rate of the FTSE 100.
Since the index was created in January 1984, it has recorded an annual growth rate (with dividends reinvested) of approximately 8%.
If this performance continues, a lump sum of £20,000, supplemented by a monthly investment of £242 from year two, could become £357,930, over 25 years.
Withdrawing 5% of this each year would give me an annual passive income of £17,896.
