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The average adult in the UK has around £11,000 saved. Well, that was in January, according to Monthly Finances. I think that could be a great start to generating long-term passive income.
I won't speculate on rare metals, buy peanut futures, or pick any of the weird and wonderful ideas out there.
No, there's only one way for me. I put my money into quality UK shares. And I reinvest all dividend income to give myself an extra boost.
10% annual profitability?
Imagine a stock that returns 10% annually on average, with 5% gains in share price and 5% in dividends.
If I invested £11,000 in it, I could get £550 a year in dividends straight away. And what remains could almost triple in 20 years to £29,000.
But if I buy new shares with the proceeds, my pot could grow to £74,000. And then 5% in dividends could give me £3,700 in passive income per year.
And someone with a 30-year horizon could accumulate £192,000 and then pocket £9,600 a year in dividend income.
<h2 class="wp-block-heading" id="h-stocks-and-shares-isa-returns”>Returns on Shares and Shares ISA
Am I a little optimistic here with a 10% total return? Maybe. But over the last 10 years, the average stocks and Shares ISA has returned 9.64% per year. and a handful of FTSE 100 The stock is expected to pay more than 8% in dividends alone.
Let's choose an example, Legal and general (LSE: LGEN). Forecasts place the dividend yield at 8.2%. And they also show a forward price-to-earnings (P/E) ratio of 11, which will fall to less than nine in 2026.
Insurance stock valuations can go up and down, but at least I don't think that valuation makes the stock look overvalued.
Dividend Yield
In dividends alone, £11,000 worth of Legal & General shares today could grow to £53,000 in 20 years, or £117,000 in 30 years. And doesn't that show the benefits of being able to keep our money invested for as long as we can? Even a few more years can make a big difference.
This assumes that the dividend and share price do not change, which is not likely. But even with that, we could end up with £9,600 a year in passive income again.
This is just one stock and it has been volatile in the past. And in today's economy, I would say that any company like this in the financial sector could be riskier than usual right now.
So, in my opinion, diversification is a must. But that doesn't have to mean compromising my goals.
Outperforming FTSE 250 returns
If we look at the smallest stocks in the FTSE 250, we still see many quality companies. And the index also houses some large mutual funds, which can drive diversification even further.
In fact, the FTSE 250 as a whole has averaged 11% annually.
Therefore, I think a mix of high-quality FTSE 100 and FTSE 250 shares is the way I would choose with £11,000 in savings. And I would also continue saving.
