Ever wondered how to create a $100,000 passive income portfolio; well in this article I am going to show you how.
There are 3 overall assumptions in this example:
1. You select stocks that pay a 5% dividend yield (that is entirely reasonable).
2. You select stocks that have 12% capital growth over a year or 1% per month.
3. You save and invest $2,000 per month
This below portfolio is built on the concept of compound growth that is the foundation of long-term investment strategies. As a result of this 50-month strategy you would have invested a total of $100,000 over 4.2 years, which would be generating you $620 a month in dividends. I only went up to 50 months as I feel that once you have $100,000 invested you have really set yourself up and as long as you don’t make any stupid decisions or risky investments from here on in you can use your experiences, lessons learnt and increased financial education to ensure financial freedom in the future. Depending on your circumstances people can live off $600 a month but most would require a fair bit more. The beauty of this, once you reached the first 50 months then you can really sit back and watch it grow from here. Some people call this the passive income snowball, which I am a huge fan off. The only thing that I would change from here if I were to call it the ultimate passive income snowball would be to diversify the income streams so they aren’t all coming from shares i.e. term deposit interest, rental income, government bonds etc.
So what is the likely hood of getting a 5% dividend stock that grows at 12% capital growth per annum?
Overall the ASX200 had the following 1-year growth returns
Started March 2nd 2018 at $5,928.20
Finished March 2nd2019 at $6,192.70
Growth of $264.5 or 4.5%
So a 4.5% growth rate is a little shy of the 12% growth rate we require, however there are a lot of junk stocks in the ASX 200. If we wittle down the stock and pick some random reputable stocks on the ASX we can find out whether they will meet the requirements. See below for a sample of 6 stocks and their returns over the last 12 months.
|Capital Growth||Dividend Yield|
The average results of the above is a capital growth rate of 14% and a dividend yield of 5%.
From the above table there are 6 stocks that would generate the base level requirements of 10% growth and 5% yield. These are just random stocks I picked to give you an example. I am not saying buy these stocks JJust showing you that the factors that I put into my calculation are reasonable. Remember that past performance is not an indicator of future performance and we see this time and time again.
Speeding up the process
There are several easy ways that you can speed up this portfolio growth process. First up you can look at the items you own in your house and determine if you genuinely need them. Smart people buy assets, poor people buy liabilities. This is an incredibly important lesson I learned from Rich Dad Poor Dad. If you don’t need a $50,000 car, and could make do with a $5,000 car then sell your car and pocket the difference. Then over the next few months slowly invest wisely your money into assets. I wouldn’t recommend just dumping it all in at one time as stocks can be at 12 month highs when you invest and then they drop from there. I would suggest dollar cost averaging as the better way of investing here. Other ways of speeding up the process include if you are renting a really fancy apartment and could make do with something a little cheaper or further out, then do that! That spare bike you have in the garage that hasn’t been used in 3 years – guess what… sell that off too. Its so easy these days with facebook marketplace, craigslist, ebay, gumtree etc to sell items that you don’t need. Just put up a couple pictures, and explain what the item is and then within a couple hours you would start receiving offers from people wanting to buy your stuff!
Stick to your guns (and plan)
Investing $2,000 a month over 4.2 years can be challenging, but you just need to work out your expenses, where you can save money, how much you can invest etc. If you have two sources of incomes then it should be much easier, however I think this is entirely reasonable with just 1 person. Make sure you pay yourself first, and don’t be just investing the leftover after you spend your money. You need to put this money aside first and then you can spend over the remaining amounts.
Reinvest the proceeds
For this strategy to work, you need to ensure that every single cent of that portfolio is being put back in and reinvested. The easiest way to do this is to ensure that the Dividend Reinvestment Plan is taken up. Signing up for the Dividend Reinvestment Plan is very easy and we show you here how to do it. This is a set a forget strategy.
What happens if it doesn’t work?
Well the worst thing that can happen is you learn an important lesson on how to save money and invest it. There are so many investors out there who are millionaires now even having lost money in the passed. The thing which gets them across the line is that they have a good saving pattern and can afford to invest money. If they lose it so what? They are still living comfortably and that will enable them to continue to invest money into the future, hopefully with a bit more understanding of the market now that they have lost some money. No one is perfect, people make mistakes and money is lost. The thing that will get you across the line is being able to save and have money to invest.
Say instead of happening in 50 months, say it took 60 months. Who cares, you are still on the right track and another 10 months isn’t going to hurt anybody. The journey is just as important as the destination.
|Month||Principal invested in month||Accumulated Principle||Capital Growth in month||Capital at end of month||Dividend Yield in month||Dividends in Month|
So what happens after this?
Why stop here, if you are living comfortably and are use to living on a reduced disposable income (as you are investing a fair portion of your salary) then you don’t need to just stop straight away and start blowing all your cash on things you don’t need. Yes you could ease up a little bit, but you still can invest your money each and every month just like you have been doing and your portfolio will continue to grow.
The sky is the limits really. Work hard, save hard, invest smart and good things will happen.
Want to read more?
If you are like me and want to read all there is one generation of passive income, then follow this link through to my Top 30 Passive Income Ideas. Here I list out similar ideas to the one above, and go into detail explaining how to generate passive income through them.
I also have my Top 10 Passive Income Book list that I save you hours and hours of reading and take the very best lessons I learnt from each book.
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