£2k in savings? Consider this investment strategy for lifetime income

Dividends paid by publicly listed companies (stocks) are the best, and arguably the most predictable, form of passive income. And unlike real estate investments, we can start building a diversified portfolio of stock investments with relatively little money.

Unfortunately, £2,000 in savings won’t generate much income today – at the very least, we could earn £180 in the first year. However, there is a simple and well-trodden way to turn our savings into a large portfolio capable of generating life-changing income.

The way to success

Starting with £2,000 in savings, here’s how an investor can grow their money into a great income-generating portfolio:

1. Invest regularly: adding money to our investments every month, even if it’s a small amount, helps our money grow faster.
2. Use compound interest: reinvest any profit (such as dividends) back into the portfolio. This means that we get leverage on our returns, which can really increase growth over time – it’s literally the secret sauce to portfolio growth.
3. Diversify: spreading money across different types of investments, such as stocks, ETFs, and bonds helps reduce risk.
4. Be patient: building wealth takes time. Stick to the plan and don’t panic during the slump.
5. Consider dividend-paying stocks: as our portfolios grow, we can invest in stocks that pay regular dividends. This can provide an ongoing stream of passive income.

This really works

It may sound simple, but it really works. However, success depends on choosing the right funds. If we make bad investment decisions we can lose money.

But to make this a little hypothetical, let me tell you what happens when we make the right investment decisions. A little over a year ago, I opened a Junior ISA. I made monthly contributions and invested in a variety of stocks. Fourteen months later, the amount invested has increased by 61% and the portfolio is now worth five figures.

Now, annual returns of around 50% are difficult to achieve. I would say it’s impossible but I know of portfolios that have achieved growth like this over time – J Mintzmyer’s example.

In the table below I’ve shown how our starting pot of £2,000 can grow, assuming £250 of monthly donations.

Now, most budding investors will be aiming for single-digit returns. But it all depends on the quality of those funds. And just a note to J Mintzmyer – even if you’re going to struggle to maintain that rate of return in 30 years.

Keeping it simple

I like to focus on quantitative data, I invest only in companies that meet the threshold, such as Twilio (NYSE:TWLO). The company trades at a price-to-earnings-growth (PEG) ratio of one, and has very strong profit margins.

The communications firm is on the next cycle of excellence that has turned the perennial underdog into a stock market darling. It has also had momentum, with the company up 66% over the past 12 months.

However, at a price-to-earnings ratio of 30 times, there isn’t much room for error. Still, I think it’s worth considering. It has an excellent track record of beating earnings estimates and I think the stock could go higher.