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Nowadays, a ten dollar bill doesn't cost much. In fact, it's unlikely to get me and a mate a pint of Guinness each in London. However, it could still lay the foundation for a great passive income in the future.
For example, let's say I save this amount every day. After a year you would obviously have £3,650. After 10 years it would be £36,500, assuming no interest accrues. Nothing bad.
But what happens if I invest that money in the stock market? That's a completely different story.
Starting
Investors in the UK can buy shares within a stocks and Shares ISA. This wonderful account completely protects my portfolio returns from any income and capital gains taxes.
The annual contribution figure is currently £20,000. So the good news is that my £3,600 a year easily falls within this limit.
So the first part of my plan would be to open an ISA account.
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.
Choosing my strategy
There are a number of strategies I could employ to try to grow my portfolio. I may decide to invest in growth stocks in an attempt to find the next amazon either NVIDIA.
Alternatively, I may want to focus more on established companies that pay dividends.
A third route could be to find companies that pay dividends but have also significantly increased their sales and profits.
These stocks could then have the chance to generate growth in both revenue and share price. The best of both worlds!
Valuable intellectual property
In my opinion, a perfect example of a high-quality hybrid stock like this is Games workshop (LSE: VAG).
The creator of war hammer is a world leader in the miniature wargaming market. It has millions of loyal and highly engaged customers who continually invest in its plastic armies.
In fact, Hollywood actor Henry Cavill, a lifelong fan, has called the figures “plastic crack”!
The company's profit margins (70.4% gross and 36.9% operating) are excellent. And it has grown its revenue at a compound annual growth rate of 16.3% in recent years.
The dividend yield is a respectable 4.2%, but the company is known for distributing excess cash to shareholders in the form of special dividends.
Returning to Henry Cavill, he will star in and produce a series adaptation and a film of warhammer 40,000 for amazon. This licensing deal could draw millions more fans into the rich fantasy tradition created by Games Workshop over many decades.
If I weren't already a shareholder, I would invest in stocks today. It's not a cheap deal at 23 times earnings, and that could present a valuation risk if any cracks appear in the growth story. But I think the premium valuation here is justified.
With a market capitalization of £3.2bn, I see the FTSE 250 company will be promoted to the FTSE 100 one day.
Passive income generation
I think it is totally realistic that a portfolio of these types of stocks could generate an average annual return of 10.5% over the long term. That's not guaranteed, of course, and neither is any dividend.
But such a return would transform £3,650 a year into £660,217 after 30 years. And by then, a portfolio yielding 6% would be paying me almost £40,000 in annual passive income through dividends.
Not bad for just £10 a day!
