£20,000 in savings? Here’s how I’d try to turn it into a £1,000 monthly passive income

When we invest for top long-term passive income, can we snag better returns by taking on some smaller stocks with a bit more risk?

| More on:

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.

A Cash ISA has looked like an attractive option in the past couple of years, with the best ones offering tax-free passive income of around 5% per year.

They’ve taken investors’ cash away from the stock market, and that’s no surprise. After all, Cash ISA interest is guaranteed… at least for the duration of the deal.

Why risk losing money just to chase a few more percent in stocks and shares? For the short term, why indeed? But for long-term investments, I think there are good reasons.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Risk vs reward

Cash ISA returns look good now, but when interest rates get back to their long-term trend that will surely change.

Meanwhile, the FTSE 100 has managed a long-term average annual return of about 7.5%, with the FTSE 250 coming in at 11%. And they’ll surely look even better when Cash ISAs get back to a measly couple of percent.

Now, both of those stock market indexes come with risk. And we usually see the smaller stocks of the FTSE 250 as carrying higher risk than the bigger FTSE 100 ones. So I’m not going to pile every penny I have into them. But I’m happy to buy and hold some as part of a diversified Stocks and Shares ISA.

And even if I don’t have the cash to use my full ISA allowance, I can dream about putting that much into FTSE 250 stocks, can’t I?

Long-term returns

Is there one I could use as an example of how dividends and price gains can compound up to a fat pile of cash?

I see abrdn (LSE: ABDN) has a forecast dividend yield of 9.6%, so it wouldn’t take a lot of price gain to reach that 11% long-term index average. And the share price is down over five years, so is this a chance to get in cheap?

It’s an investment company, and I’d expect its earnings and share price to be more volatile than the market itself. When stocks are rising, more people pump cash into firms like abrdn and they can beat the market.

But then, in down spells, shareholders can sell up and push investment management stocks right down. It’s really not nice looking at how similar stock prices fell while inflation and interest rates were climbing.

Passive income

Anyway, what might I earn from putting £20,000 into abrdn shares, just from the dividends? Assuming the yield were to stay at 9.6%, a one-off sum like that could grow into £125,000 in 20 years. And that could then pay me my £1,000 per month in passive income.

If I could hit the FTSE 250’s 11% average, I could boost that to £1,400. And even the FTSE 100’s 7.5% could add £530 to my income each month.

I’d never put all my eggs in one basket. And I’d only buy a stock like abrdn as part of a diversified ISA. But doing sums like this convinces me that shares are a much better option for long-term returns than a Cash ISA.

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.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

Growth Shares

Growth stock YouGov just fell 46%. Time to buy?

YouGov’s share price just fell from 820p to 440p after a poor trading update. Is now a good time to…

Read more »

Investing Articles

2 mouthwatering FTSE growth stocks I’d buy and hold for 10 years

Growth stocks purchased today could be the gateway to many years of capital growth and returns. Here are two picks…

Read more »

Investing Articles

Can the IAG share price really be as dirt cheap as it looks?

While most shares have recovered since the Covid days, the IAG share price is staying stuck to rock bottom. Surely…

Read more »

Investing Articles

BAE Systems shares are flying! Have I missed the boat?

Sumayya Mansoor looks into whether or not BAE Systems shares are still a good buy for her portfolio after the…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

1 heavyweight FTSE 100 share I’d buy as London retakes its crown

Some Footsie firms are extremely large, but that doesn't mean they couldn't get even bigger. Here's one such FTSE 100…

Read more »

Investing Articles

I’d buy 5,127 National Grid shares to generate £250 of monthly passive income

With a dividend yield of 6.5%, Muhammad Cheema takes a look at how National Grid shares can generate a healthy…

Read more »

Investing Articles

The FTSE 100’s newest member looks like a no-brainer to me!

This Fool explains why she sees the newest member of the FTSE 100 as a great opportunity after its recent…

Read more »

Investing Articles

Empty Stocks and Shares ISA? Here’s how I’d start earning a second income from scratch

Like the thought of earning extra cash tax free? Our writer explains what he'd do to begin earning passive income…

Read more »