For many, earning £1,899 in monthly passive income might sound like a pipe dream.
But that shouldn’t be the case, even for those of us who are late to investing.
The formula is pretty simple.
It all comes down to making regular contributions to an investment account — ideally a Stocks and Shares ISA due to its tax benefits — and investing wisely to beat the market.
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.
So, let’s start from the top.
In order to earn £1,899 sustainably from a Stocks and Shares ISA, I’d suggest an investor would need £455,760.
That’s because 5% is typically a fairly sustainable, albeit sizeable, dividend yield to spread across a portfolio.
Now, £455,760 might sound like a lot of money, and it is. But it’s eminently achievable if investors are consistent and wise.
The secret to success is…
Well, it’s all about compounding.
It’s the quiet force that turns small, regular investments into serious wealth over time.
At its heart, compounding is about earning returns not just on your initial investment, but also on the returns those investments have already generated.
Each reinvested dividend or capital gain becomes new capital that can, in turn, earn more.
Over years and decades, that snowball effect can grow surprisingly powerful.
Here’s an example of how an investor could compound their way to £455,760.
Assuming an 8% annualised return — which would be just above the long-term average — an investor putting aside £750 per month could reach £455,760 in 20 years.
That might sound like a long time, but this isn’t a get rich overnight scheme.
Of course, more successful investors can get to the desired endpoint quicker.
Personally, my investments almost doubled in value in 2024 and over the long run I’m looking for double-digit growth.
Assuming an annualised return of 12, it would take 16.5 years to reach £455,760.
Investing for success
Successful investors typically use a data-driven approach. This means being led by figures and metrics, and not by a hunch.
One stock that I believe stands out from a data perspective is UK-based Arbuthnot Banking Group (LSE:ARBB).
It’s not quite a peer of Lloyds or Barclays, but focuses more on high-wealth clients and specialist lending.
It’s also a relative minnow. The company is currently valued around £150m, which means it’s a fraction of the size of those household names.
That itself introduces a degree of additional risk… but not too much. It will be perceived as being less resilient, however.
Likewise, smaller stocks have larger spreads being the buying and selling price (bid and ask). This means the stock may need to go some distance (2%-3%) before reaching the original investment value.
Ok, so what are the good bits? Well, it’s a strong business that has been in operation for nearly 200 years.
And the valuation data is really strong. The price-to-book (P/B) ratio sits at just 0.53, approximately half that of its larger peers.
Likewise, the forward price-to-earnings (P/E) ratio of 8.05 falls to 5.6 by 2027, indicating impressive earnings growth throughout the medium term (current year excluded).
At 6%, the dividend yield also beats its larger peers and rises to 6.8% by 2027.
In short, I believe it’s certainly worth considering.
