Image Source: Getty Images
Being able to generate large and passive income is a dream for most investors. We only have limited time on this planet, so it’s paramount to finding ways to become economically independent and just enjoy life.
From owning a buy-in real estate, to buying dividend stocks, to starting an online side hustle, there are many ways to try and raise your second income. One optimistic strategy can provide a lump sum of £20,000, providing the ability to do a regular top-up, and the opportunity to earn an annual passive income of over £45,000.
1. Reduce tax burden
The biggest “cost” for any of us is not rent, bills, or even inflation.
Investors facing a capital gains tax (CGT) of 8% to 24% and a dividend tax of 8.75% to 39.35% will often pay tens of thousands of pounds to HMRC over time. Annual allowance of £3,000 for CGT and £500 for dividends rarely protects substantial allowances from tax authorities.
Also, with tax rates rising, it is more important than ever to reduce (or ideally eliminate) the payments you pay to HMRC. This can be easily achieved with individual savings accounts (ISAs), for example, so that Britons can save or invest £20,000 each year.
Given the potential for strengthening long-term returns, ISA investors can benefit more from tax cuts compared to those using (obviously safe) cash ISAs.
Please note that tax procedures depend on each client’s individual circumstances and may change in the future. The content in this article is for informational purposes only. It is not a form of tax advice or constitutes. Readers are responsible for carrying out their own due diligence and obtaining professional advice before making investment decisions.
2. Diversify for growth and safety
Clearly, the greater return potential means investors have to absorb higher risks. Bank cash has become stable over time. The stock market not only rises, but rises.
However, the possibility of a truly life-changing return may make equity investment a better choice for many.
Investors can adjust their portfolios to manage the amount of risk they are ready to take. For example, you could consider building a portfolio of defense, utilities, healthcare and consumer staple foods to balance growth and safety. Buying a healthy number of stocks (10-15) in various industries can also protect revenue from turbulence between one or two companies.
The Exchange Transaction Fund (ETF) which holds a basket of currencies is a quick and easy way to achieve this diversification. Vanguard ftse All-world ETF (LSE: VWRP) is one such financial instrument that I think is worth considering spreading risk.
Passive Income Creator
Tracking the FTSE All-World Index, the fund consists of 3,624 blue chip shares and intermediate stock growth stocks across the developed region. Less than 63% of its holdings are found in the US stock market. That means investors are exposed to quality market leaders and innovators. nvidia, apple, visa, Caterpillar and Palantir.
Since its creation in 2019, the Vanguard ETF has generated an average annual revenue of 9.9%. That’s at the top of what share investors can realistically expect every year. And if this continues, someone with a lump sum payment of £20,000 and An investment of £400 a month into this fund will turn this into £757,012 in 25 years.
This will provide a passive income of £45,421 if invested in 6% of the employable dividend stock. I think it’s worth considering even if the high weight of US stocks could leave them vulnerable to state recessions in the short term.