Image source: Getty Images
Can you put a price on a cup of coffee? I mean, sure, you walk into a Starbucks and they give you a price. Nowadays it also represents a large outlay. A cappuccino can cost me five quid and change. But that price could turn into something very different if I invest it, where small sums can turn into large sums and attractive passive income, if given enough time and knowledge.
My Foolish colleague Royston Wild demonstrated it in this article. It took a saving of £5.40 and showed how it could reach £2.4 million within a reasonable time frame. And while I don't have a daily coffee habit that I can cut out of my budget, it made me wonder where else I could find some small savings.
Give up?
In my own situation, I would like to think about the amount of passive income I receive. In particular, I am interested in knowing how much it would take to start receiving the amount to buy a coffee every day. In short, how can I generate a passive income stream of £5.40 a day by giving up cups of coffee?
Let's start at the end. If my target is a 5% dividend yield from a handful of high-quality income stocks, I would need £39,420. That's a lot of coffee or coffee equivalents. But if I redirected my Costa fund and got it doing well in the stock market, I could get it back in just over a decade. Forget coffee now; In 11 years (approximately) you will earn £5.40 a day from your investments. Not bad.
My calculation is based on a 9% total return on anything I invest in. Getting this key part of the equation right or wrong can result in my income being substantially higher or lower.
yellow stickers
One stock I own that I'm optimistic about surpassing that number in the coming years is tesco (LSE:TSCO). The stock is up 31% in the last year and pays a tasty 3.41% dividend.
It is also a defensive action. It could work well even during a time of economic unrest. Sales of food and basic necessities (including a certain caffeinated product) are the last things to stop being purchased.
The company is a clear leader with almost double the market share of its closest competitor. That offers efficiencies through economies of scale, a boon in a cut-throat sector. Their clients also seem to agree. At least their Clubcard is incredibly popular, with over 20 million members returning for yellow tag discounts.
As for the risks, you have just been handed a large NI bill from the employer. A price-earnings ratio of less than 20 is also not the cheapest. However, overall, I consider the stock to be fairly valued. I think this is one that investors should consider looking for passive income. I guess I'll stop by there to pick up some instant coffee now, too.