£12,000 in savings? Here’s how I’d aim to turn that into £2,000 monthly passive income

This FTSE 100 stalwart shows that big passive income can be created from even a modest starting stake. Here’s how I’d aim to achieve it from today.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Bournemouth at night with a fireworks display from the pier

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

If I wanted to create a lifelong passive income of £2,000 per month, what type of stock could help me achieve it with the smallest starting stake?

Well, living in the UK provides easy access to one of the largest stock markets in the world. Across the London Stock Exchange, I can peruse thousands of businesses with big earning potential.

London might be the best destination in the world for income stocks. Plenty of firms pay out 8% or more right now. Some pay as high as 30%. If I snaffle up a few world-class dividend stocks I could build a passive income near instantly. 

An investment

Now, while I budget in months, businesses tend to work in years. So rather than a £2,000 a month goal, I’ll need to think about targeting £24,000 a year. And at an 8% return, I’d need to stump up £300k.

Well, let’s take a quick breather as that’s quite a lot of money. I don’t have a few hundred thousand pounds hiding under my mattress, sadly. I’ll need a different route to my goal.

Instead, I could pool the £12k savings I have and invest wisely. I won’t be fixated on the next year’s dividend, I’d treat the stocks I buy like an investment, like I’m a part owner in a growing business – which of course I am. 

One common strategy is to be a contrarian. Rather than following the market herd, I could hunt out-of-favour stocks. These beaten-down companies often prove to be cheap buys. 

Cheap buy

Take Imperial Brands (LSE: IMB) for example. This FTSE 100 stock yields around 8% right now, although that’s not what I’d be looking at. I’d be looking at the business itself. 

Imperial sells cigarettes. I wouldn’t blame anyone who doesn’t like the idea of buying into a tobacco stock. Smoking is in decline. The health effects are well known. Some governments are even trying to ban it. There’s also the ethical issue of profiting from a ‘sin stock’. 

But none of this is new. Cigarette use has been declining since the 1970s. Investors have avoided the stock since then, and this is where contrarians could have netted one of the best stock market investments in recent years.

Had I invested in Imperial in 1996, I would have watched my starting capital increase by 2,395% (by reinvesting dividends). The contrarian option would have handed me above-market returns of an annualised 13.5%. 

If I had invested £12,024 then it would have grown to the required £300k amount. And with a forecast 7.8% yield for 2024, I’d expect to receive £1,950 monthly passive income – pretty close to my goal. 

Of course, the past is the past. It’s tricky to predict which stocks will win out in the long run.

In general though, when everyone is going one way, it can pay to go the other. I suspect tobacco is still an undervalued contrarian play although I don’t have a position in Imperial specifically. 

The stock market has countless examples like this — unloved companies that make achieving a goal like a £2k monthly passive income from a surprisingly small starting stake. I don’t doubt for a second a few great contrarian stocks are out there at the moment.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Fieldsend has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands Plc. 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.

More on Investing Articles

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Could the FTSE 100 be set to soar in 2024?

The FTSE 100 keeps threatening to go off on a growth spree. And weak sentiment keeps holding it back. But…

Read more »

Investing Articles

Is this FTSE 100 stalwart the perfect buy for my Stocks and Shares ISA?

As Shell considers leaving London for a New York listing. Stephen Wright wonders whether there’s an undervalued opportunity for his…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

3 things I’d do now to start buying shares

Christopher Ruane explains three steps he'd take to start buying shares for the very first time, if he'd never invested…

Read more »

Investing Articles

Investing £300 a month in FTSE shares could bag me £1,046 monthly passive income

Sumayya Mansoor explains how she’s looking to create an additional income stream through dividend-paying FTSE stocks to build wealth.

Read more »

Investing Articles

£10K to invest? Here’s how I’d turn that into £4,404 annual passive income

This Fool explains how using a £10K lump sum can turn into a passive income stream worth thousands for her…

Read more »

Investing Articles

1 magnificent FTSE 100 stock investors should consider buying

This Fool explains why this FTSE 100 stock is one for investors to seriously consider with its amazing brand power…

Read more »

Rainbow foil balloon of the number two on pink background
Investing For Beginners

2 under-the-radar FTSE 100 stocks under £2

Jon Smith identifies two FTSE 100 stocks that he believes are getting a lack of attention from some investors but…

Read more »

Investing Articles

£8,000 in savings? I’d use it as a start to aim for £30k a year in passive income

Here's how regular investing in the UK stock market, over the long term, could help us build up some nice…

Read more »