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An investor aiming to generate £2,000 in monthly passive income from an ISA would typically need a portfolio of about £480,000. That’s assuming the portfolio was invested in assets (stocks and bonds, etc.) that delivered a 5% yield.
The calculation is straightforward: £2,000 per month equals £24,000 annually, and dividing that by a 5% yield gives the £480,000 investment target required to produce the desired income level tax-free within an ISA.
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.
Starting from scratch
Many Britons don’t have any savings or a Stocks and Shares ISA. However, building a £480,000 is easier than it seems. For an investor starting from zero, reaching this goal requires commitment to regular investing and harnessing the power of compound growth over time.
By contributing monthly sums into a diversified portfolio, the portfolio can grow significantly over two or three decades. For instance, investing about £500 per month into a fund averaging double-digit returns could help an investor accumulate the £480,000 portfolio in roughly 22 years. That’s assuming a 10% rate of growth. More conservative portfolios with lower returns will require a longer timeline or higher periodic contributions to reach the same milestone.
Compounding is critically important. While many people will talk about investing in dividend stocks and re-investing the returns, the easier way is to invest in companies or funds that re-invest on your behalf. Companies that don’t pay a dividend typically use that cash to invest in growth.
But the first part really is about consistency. Establishing disciplined, consistent investment habits early and benefiting from tax advantages make this path achievable. This is how we transform modest monthly contributions into a reliable £2,000 monthly passive income stream inside an ISA.
Knowing where to invest
Investing poorly could result in investors losing money. However, over the long run, index-tracking investments have always outpaced the returns on cash. And well-chosen individual investments have the potential to outperform. So, where should investors put their money?
Well, the current market environment demands caution. US stocks are at all-time highs and valuations include premiums. As such, investors should seek areas of real undervaluation.
One stock that has piqued my interest is Melrose Industries (LSE:MRO). I’ve been incrementally adding this stock to my portfolio and it’s now one of my largest holdings. I believe it’s been overlooked by the market and it could follow Rolls-Royce’s trajectory upwards.
So, why do I like it? Well, it’s trading around 15 times but management is aiming to grow earnings by around 20% a year through to 2029. Using the price-to-earnings-to-growth (PEG) metric, we can immediately see a potential discount.
Typically a PEG ratio of one would be a sign of fair value. So, at 0.75, Melrose is potentially undervalued. However, Melrose isn’t just any company. It operates in industries with high barriers to entry and it has a sole source supplier position for 70% of its sales. That’s an impressive moat.
So, with its peers trading with PEG ratios over two, there’s cause to believe there will be a re-rating here. It just may take a catalyst to make that happen.
