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Investing in UK shares is a proven strategy for generating an income without having to lift a finger. And given enough time, a quality investment portfolio can grow large enough to replace an entire salary, paving the way for an earlier retirement.
So want to start earning £45,000 a year from the stock market without having to work for it? Here’s how to get started.
Setting targets
On average, UK shares typically pay a dividend yield of around 4%. But with a bit of careful selection, it’s possible to craft a portfolio that provides a payout closer to 5% without taking on too much additional risk.
At this elevated rate, to earn £45,000 a year passively, a portfolio needs to be valued at £900,000. That’s certainly a daunting figure that may seem impossible to reach. But the reality is. Thanks to compounding, anyone who can put aside £500 each month can reach this threshold given enough time.
Assuming the custom income portfolio also generates a further 3% in capital gains each year, the total return sits at 8% – roughly the same as the UK stock market average. And by consistently investing £500 a month at this rate for just 32 years, a portfolio will surpass the £900k threshold when starting from scratch.
That’s a nice way to set up a strong retirement, but waiting for three decades is far from ideal. This is where better stock picking can save the day.
What if instead of earning 8%, a smarter investor earns closer to 12%? In this scenario, the journey is shortened by seven years.
Unlocking higher gains
While simple on paper, unlocking a double-digit annualised return is far easier said than done. However, there are plenty of UK shares that have delivered even better results as Goodwin (LSE:GDWN) shareholders have learned first-hand.
Over the last 20 years, the engineering group has generated a jaw-dropping 6,762% total return for shareholders. That’s the equivalent of a 23.5% annualised return.
Just to put this extraordinary performance into perspective, anyone whose been drip feeding £500 a month in Goodwin shares since 2006 is now sitting on a life-changing £2,656,958 – enough to generate a £132,848 passive income if reinvested at a 5% yield.
Is it too late?
At a market-cap of £2bn, Goodwin’s days of generating 20%+ annualised returns are likely in the rear-view mirror. But that doesn’t mean the stock can’t continue to be a market beater.
The group’s order book continues to expand, revenue growth is still surging and operating profits are following along. And this momentum is only being further amplified by the group’s recent partnership with Northrop Grumman, which turned Goodwin into a sole-supplier for a critical component in a 30-year US submarine contract.
However, while transformational, this partnership also introduces significant customer concentration risk that’s only amplified by the cyclical nature of its other contracts. And should its relationship with Northrop Grumman end earlier than expected, or recessions shift infrastructure project priorities by the UK or US governments, Goodwin’s lofty valuation exposes the shares to potentially extreme volatility.
Nevertheless, with an impressive track record of defying expectations, this business could be worth a closer look.
