How feasible is it for the average Brit to achieve a £3,000 monthly passive income? One that might be expected to be withdrawn indefinitely as a kind of second income?
Well, if we’re talking averages, let’s bring up the data. According to recent sources, the average inhabitant of our green and pleasant land (who I’m going to call Barry) has a savings pot of £16,000 and saves £226 per month. On those numbers, that big passive income goal sounds like a pipe dream for poor Barry, doesn’t it? Or does it?
Let’s run a quick calculation. The historical stock market returns for UK and US stocks is in the 9%-10% range. While the past is no guarantee of what will happen in the future, we can use these numbers to work out what kind of nest egg Barry can build up to.
The key factor in all this is time. The more years, the more compounding and, of course, the more money. If Barry starts saving early enough, he could have 30 or more years to let those investments snowball higher and higher.
Here’s the calculation: starting with £16,000, adding £226 a month, and compounding at 9.5% for 30 years turns into (drumroll please) £666,863. Not bad.
At a 4% yearly withdrawal rate (the figure often considered safe) then Barry is looking at a monthly passive income of £2,223.
That’s a little short of the original goal. Using the same withdrawal rate, Barry would need £900,000 in an ISA for a £3,000 monthly passive income. That’s a fair chunk of change and might be unrealistic for an average saver.
But there are strategies that can help those with a smaller savings rate or fewer years to work with…
Reasonable stuff
Through a little shrewd stock picking, Barry might aim for a small edge on those average returns. The London Stock Exchange is jam-packed with thousands of high-quality businesses to choose from. One company at the forefront of state-of-the-art technology is Filtronic (LSE: FTC).
The firm produces devices that facilitate long-distance wireless communication. Think radio components and the like. A big order from US-based SpaceX has sent the share price – formerly trading in pennies – into orbit. The shares are up 15 times in the last couple of years.
Of course, it’s best not to get carried away by an interesting-sounding stock. Many were entranced by tech stocks during the dotcom boom and we all know what happened with that. Filtronic were one of the casualties in 2000 too, losing 90% from the highest point to the lowest.
On valuation, the firm trades at a pricey but reasonable 32 times earnings. With revenue forecast to continue rising and a chance of more lucrative contracts on the horizon, I’d say this is a stock to consider for those looking to build towards passive income.
