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If I were to invest £1m into a host of dividend-paying stocks like Card Factory, Lloyds, NatWest, Phoenix Group and Legal & General, I could hope to earn around £60,000 annually (£5,000 a month) in passive income. That’s because the dividend yield would likely average around 6%, indicating the size of the potential return annually.
Now, the higher the yield, even when it’s an average of several stocks, is likely to be less sustainable than a lower yield. Investment writers often talk about 4% being a more sustainable yield that may also match the value of the investments to grow over time — you’ll notice that high yield stocks typically don’t offer much in the way of appreciation.
But while £5,000 a month sounds nice, most people reading this will be asking “where do I get £1m from?” The issue is, it takes time and consistency.
Compounding to £1m
Ok, so investing £500 a month into Stocks and Shares ISA means that after 29 years could result in a £1m pot. That’s assuming an average growth rate of 10% a year on the investments made within the ISA. That’s a strong rate of growth, but achievable for investors that prioritise data-driven strategies and avoid common pitfalls.
The secret behind the growth is compounding. Ten percent growth on £10,000 takes an investor to £11,000. But 10% growth on £500,000 takes an investor to £550,000. This is how money makes more money, and it’s why our investments grow faster the longer that we leave them invested.
However, inflation’s working against us. Assuming an annual inflation rate of 2% means that the purchasing power of £5,000 in 2054 would be equivalent to having about £2,816 now, due to the ravages of inflation over this period.
Where to invest
Like most people reading this, I don’t have £1m in my Stocks and Shares ISA. And as such, I’m prioritising growth to be able to get there.
One such investment I continue to back for the long run is Google parent company Alphabet (NASDAQ:GOOGL).
Alphabet’s forward price-to-earnings (P/E) ratio indicates it’s slightly cheaper than the information technology sector average. However, the real indication of value is the growth-adjusted price-to-earnings-to-growth (PEG) ratio which indicates a 40% discount to the sector.
Analysts bullish on Alphabet highlight strong recent revenue growth, especially in Google Cloud, and operational efficiency improvements that have boosted earnings per share. This optimism’s supported by ongoing innovation and expansion in key areas.
However, regulatory risks, artificial intelligence (AI) competition, and heavy investment costs temper enthusiasm despite the solid financial performance.
Personally, I’m in the former camp and I believe Alphabet stands to be a dominant force and net beneficiary of the AI revolution. I’m also bullish on self-driving projects and its potential role in quantum computing. I certainly believe UK investors should consider this, the cheapest Mag Seven stock, very carefully.
