How you can make a passive income by investing just £5 a day in UK shares – Motley Fool UK

Making a passive income with UK shares has become more difficult this year. Many FTSE 100 and FTSE 250 stocks have cut or cancelled their dividends, thereby reducing the choice available to income-seeking investors.

However, over the long run, a portfolio of British stocks can deliver a generous income for a wide range of investors. By investing as little as £5 per day in a diverse range of shares, you could improve your long-term financial prospects.

Making a passive income with £5 per day

Investing that amount daily in UK shares to make a passive income may not sound like a profitable strategy over the long run. After all, over the course of a working life of 40 years, it amounts to just £73,000 with no return. However, the past performance of the stock market shows that it can turn modest regular investments into large sums of money.

For example, the FTSE 100 has returned 8% per annum (including reinvested dividends) since it was formed in January 1984. Assuming the same return on your £5 daily investment would produce a nest egg valued at around £534,000. From that, a 4% annual withdrawal would produce an income of over £21,000. That’s more than double the current State Pension payment.

Investing in UK dividend shares

As mentioned, generating a passive income from UK shares has become more difficult in recent months. Dividends have fallen across the stock market. However, the past performance of the economy suggests that growing dividends will return. The current weak economic outlook is unlikely to last in perpetuity. What’s more, the stock market’s growth is likely to return to similar levels to those experienced in the past.

In fact, buying British stocks today could be a means of obtaining an even higher return than the market average. Many high-quality businesses are trading at low price levels that haven’t been seen for many years. That potentially undervalue their prospects. Buying a range of them today could allow you to benefit from the recent market crash and a likely recovery in the coming years.

Building a portfolio

Of course, building a passive income portfolio can be done at low cost. Many sharedealing providers offer services such as regular investing, where you can buy UK shares monthly at a very low cost. This will help you to diversify across a range of businesses. This will reduce overall risk and could be important, given the uncertain outlook for the economy.

While it may take many years to build a portfolio capable of sustaining you in older age, the stock market’s growth potential suggests it’s an achievable goal for almost any investor. With many shares currently trading at cheap prices, now could be the right time to start that process to improve your long-term financial outlook.

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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