Very few of us would turn around and say that £2,000 of tax-free passive income wouldn’t have a noticeable impact on our lives.
And this might sound like a pipe dream for most people, but it’s actually something that’s very achievable. It’s not a get-rich-quick scheme or crypto pump and dump, it’s about investing steadily and sustainably over time.
Let’s starting by asking what we would need for £2,000 of monthly passive income?
Well, that’s £24,000 per year and receiving that as investment income would likely demand around £480,000 in capital. That means we’d be looking for a 5% dividend yield on our investments once we’ve reached the critical figure.
Getting to £480k
I appreciate many readers will see this and realise that building an investment portfolio worth £480,000 isn’t going to be easy. And while there’s an element of truth there, it’s also the case that those who follow a well-trodden path will find it pretty simple.
So, how does it all work?
Well, step one is opening a Stocks and Shares ISA with a UK brokerage. I use Hargreaves Lansdown but there alternative that have smaller dealing charges (when you buy and sell stocks).
Step two is making a monthly contribution to fuel the ISA. In this example I’m using £500 a month. It’s not insignificant, but it helps us reach our end point as quickly as possible.
And then step three is making sensible investment decisions. Novice investors may start by investing in funds or trusts because they offer instant diversification. Others may choose to follow a suggested portfolio.
In short, assuming an 8% return is achieved annually, this £480,000 figure could be reached in 25 years. Investors seeking higher returns may be able to get there sooner.
Knowing where to invest
I can only imagine how daunting the stock market may be to a novice investor. They’ve just put their first £500 in and now they need to find stocks, trusts, funds, or even bonds to invest in. Many new investors start with what they know, e.g. Tesco, but that’s not always the best option.
Investors looking to start the right way — investing in companies that appear meaningfully undervalued — may wish to consider the London Stock Exchange Group (LSE:LSEG).
According to consensus estimates, the London Stock Exchange Group is the most undervalued stock on the FTSE 100, trading around 42% below analysts’ average target.
The company operates global financial market infrastructure and data services, providing trading, clearing, and analytics platforms used by institutions worldwide. Interestingly, data and analytics is by far its largest sector.
The stock’s valuation is attractive given its blue-chip status. It trades with a forecast price-to-earnings of 21.4 for 2025 and 19.2 for 2026, based on earnings per share projections of 399p and 442p, respectively.
The company’s quality is reflected in its 49.5% adjusted EBITDA margin. In simplistic terms, this figure tells us that a lot would have to change for the company to swing to a loss.
However, risks remain. The firm’s annual subscription value growth is modest, and as legacy products like Eikon are phased out. The shares have fallen a lot this year and it needs to impress the market with product delivery.
