A £1,000 monthly passive income — £12,000 a year — sounds like something reserved for people who already have a lot of money. But that’s not the case.
With a Stocks and Shares ISA and a long enough runway, it’s a realistic target for ordinary investors. The mechanism that makes it possible is compounding, and it’s worth understanding properly before we get to the numbers.
Start early, believe in compounding
Compounding is simply what happens when returns build on previous returns. Reinvest a dividend (or invest in growth stocks that essentially do that for you — they reinvest the company’s profits) and next year you’re earning income on a slightly larger holding. Watch a share price rise and future gains come off a higher base. Nothing complicated — but give it 10 years and the effect becomes very noticeable indeed.
However, compounding starts to show after a relatively short period of time.
The annual ISA allowance is £20,000, so someone maxing it out each year would have put in £200,000 over a decade before investment returns are even considered. At a 10% annual return — roughly what global equity markets have averaged historically, though with plenty of bumpy years along the way — regular monthly contributions of around £1,667 would compound to around £300,000 over 10 years.
So how much do you actually need to hit £12,000 a year? The answer depends on the yield. Personally, I believe a 5% dividend yield is very achievable and sustainable with the right stocks. That would suggest an investors needs £240,000 in a portfolio.
No dividends are guaranteed and markets don’t move in straight lines… but this is the theory.
Putting that money to work
Beyond the theory, novice investors need to consider where to put that money to work. Combining diversification and conviction is a popular strategy. Growth-oriented stocks are arguably the best way to grow the size of the portfolio — but risk can be greater here.
One stock I find genuinely compelling right now is Sanmina Corporation (NASDAQ:SANM). The US-listed electronics manufacturing specialist sits at the intersection of cloud computing, AI infrastructure, and advanced industrial systems — and yet the market doesn’t appear to have fully priced that in.
The shares trade at around 11.7 times forward earnings, roughly 45% below the sector median. With medium-term earnings growth estimated near 26% annually, the implied price-to-earnings-to-growth (PEG) ratio of around 0.49 suggests the growth story isn’t fully reflected in the price.
For context, Celestica — a very similar business I invested in over three years ago — now trades at 29 times forward earnings after rising more than 3,000% in five years. Sanmina looks like Celestica did before the market caught on.
The main risk is the balance sheet. The pending acquisition of ZT Systems’ data centre manufacturing business from AMD will push net debt towards $2bn, leaving the company more exposed if AI spending slows.
That said, I absolutely think this company’s worth considering.
