Having five grand of passive income rolling in every month sounds nice in theory, but perhaps not achievable in reality. However, the figures show that this is actually possible for most people, given enough consistency and patience.
Without further ado, let’s dive straight in and explore how this might look in practice.
Stocks and Shares ISA
The first thing a newbie investor would normally do in the UK is open a Stocks and Shares ISA. This account acts as a protective wrapper, shielding any returns from the taxman. As well as making life much simpler, this also helps the portfolio grow far more quickly.
The annual ISA contribution limit is currently £20,000, but a substantial portfolio can be built up investing just half this amount. That would be £10,000, of course, or roughly £834 every month.
Without any return at all, this cash pile would build up to just over £250,000 after 25 years. But achieving an 8% annual return from stocks would transform that into £758,471.
Clearly, the difference is massive. But it gets even wider after just another five years, because the figure rises to more than £1.17m!
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.
Passive income potential
At this point, things would become really interesting because the ISA would be capable of throwing off some serious passive income in the form of dividends.
Indeed, a dividend yield of 5.5% would equate to almost £65,000 per year in passive income. Or the equivalent of around £5,400 every month (dividends are normally paid twice per year or quarterly, not every month).
Note, I haven’t included any investment platform fees here. And I’ve assumed an 8% annual return, with dividends reinvested until the target sum is reached. However, in reality, the return could end up lower or much higher, while individual dividends are not assured.
Nevertheless, despite these necessary caveats, it shows what’s possible with a consistent monthly investment schedule and patience.
FTSE 100 trust
The question now is, how many and what sort of stocks to consider buying to aim for a £1m+ ISA portfolio?
There’s no easy answer to this as people have different levels of risk tolerance. But a diversified portfolio of 20-30 investments wouldn’t be a bad target to shoot for, in my opinion.
One stock I like is Scottish Mortgage Investment Trust (LSE:SMT). The managers of this FTSE 100 trust spend most of their time trying to find the big winning growth companies of tomorrow.
The long-term share price performance — up around 350% in the past 10 years — tells us that Scottish Mortgage has had great success doing this. The likes of Amazon, Tesla, Nvidia and Netflix have all generated tremendous returns for shareholders.
However, looking ahead, it’s possible that artificial intelligence (AI) becomes so advanced and widely accessible that genuine competitive advantages in tech start to disappear. This could make identifying the next next crop of winners a much more difficult task.
Despite this risk, I retain faith in the stock-picking prowess of Scottish Mortgage. The managers are placing a special emphasis on firms that are resilient and adaptable to change, as these will likely be crucial as the age of AI gathers steam.
Trading at a near-11% discount to its underlying assets, I think the stock could be a shrewd long-term buy to consider at today’s price.
