How I’d invest £500 a month to achieve a £10,000 passive income per annum

£500 a month may not sound like much, but it’s £6,000 a year — or £120,000 over 20 years. And if it’s being invested sensibly in a Stocks and Shares ISA then my target of an annual £10,000 passive income could be achieved before the 20 years are up.

A prime example of the benefit of regular long-term investment is the FTSE 100 index. Launched in January 1984 with a starting value of 1,000 points, the FTSE 100 is currently hovering around and above 7,000. Plenty of us will benefit from this sevenfold FTSE 100 increase in retirement as pension funds have always been heavily invested in its blue-chip shares. But I’m looking at an additional £10,000 passive income on top of a state, or private, pension.

An expanding profitable company will usually increase its dividend over time and, in normal market conditions, see its share price increase too. I also plan to reinvest dividends in new shares to help keep the growth going over the period. So I feel it’s not unreasonable to expect my invested £120,000 to increase in value to at least £200,000 over 20 years, and if this sum has a 5% dividend yield then it could provide me with the targeted £10,000 passive income per annum.

I have already bought two of the following stocks and will likely buy all three:

Legal and General

Okay, a life insurer and pensions specialist doesn’t sound exciting, but when I want excitement I might buy a penny-share mining stock. And in the long term, the odds are in favour of Legal and General outperforming the speculative stocks and rewarding me with a capital gain and high income. The company has three major positives in its favour as a solid long-term investment:

It provides products that are particularly suited to the UK’s growing population, which has a longer life expectancy than ever before;
It pays a big dividend – the yield is 7%;
The dividend usually increases year by year.

I think things look good for this company and I have bought some shares.

Diageo

This global drinks giant is continually expanding into new markets and increasing its revenues and market share. It owns established brands such as Guinness, Johnnie Walker and Gordon’s.

Diageo’s dividend continues to increase year by year. This is a high-quality stock and I am considering buying some shares.

Aviva

Life insurer Aviva has similar advantages to Legal and General, with a high dividend yield and an aging and growing population to tailor its products for. An additional potential bonus is that I think both of them have a better-than-average chance of being taken over. The British pound is very weak against the US dollar, and a large American company could snap these two up in a jiffy. The proceeds could then be invested in similar long-term buys in pursuit of my goal.

Of course, there is the risk that a high-quality stock can become a plodder or worse but, over 20 years, history shows us that the stock market rewards sensible long-term investment.

The post How I’d invest £500 a month to achieve a £10,000 passive income per annum appeared first on The Motley Fool UK.

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Michael Wood-Wilson owns shares in Legal and General and Aviva. The Motley Fool UK has recommended Diageo. 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.