£20,000 in savings? Here’s how to target £1,221 a month in passive income

Building a portfolio of stocks that keeps delivering passive income year after year doesn’t require any expertise. Today, I’m going to explain how anyone armed with a pot of savings has the potential to eventually generate hundreds of pounds every month.

Big money

Let’s assume we have £20,000 to put to work. I’ve gone for this amount simply because it’s the most someone can currently put into a Stocks and Shares ISA in a single tax year.

Now, let’s say we put that money to work in a company that manages to compound in value by 10% annually. It does this through a combination of share price growth and dividends. After 20 years, we’d have a stonking £146,561. By then, a 10% yield on this amount would give the equivalent of £1,221 a month.

Sure, this won’t be quite so impressive when two decades of inflation is taken into account. But it still demonstrates what might be achieved without virtually any effort. It also helps to explain why we’re big cheerleaders for long-term investing here at Fool UK.

Pie in the sky?

That 10% might sound a bit ambitious. After all, the FTSE 100 index has only compounded by 6% or so in the last 20 years with dividends reinvested. However, there are a few stocks that have eclipsed these growth rates… and then some.

One example is health and safety tech firm Halma (LSE: HLMA). While there have been some wobbles along the way, it’s delivered a growth rate of 15% since 2005!

What’s behind this magnificent return?

At least some of this has been the result of consistently rising organic revenue. This has been further boosted by acquisitions. Halma also benefits from operating in heavily-regulated fields where use of its products is essential, regardless of how the wider economy’s faring.

This success has also allowed management to hike the dividend every year for more than 40 years! Granted, the yield remains negligible at around 0.8%. But this sort of consistency is like hen’s teeth in the UK stock market.

Throw in a period of low interest rates — never a bad thing for growth-focused companies — and such outstanding returns begin to make sense.

No sure thing

Halma shares could continue delivering for investors if June’s full-year numbers are anything to go by. In addition to beating expectations on profit for the 12 months to the end of March, management also forecasted higher revenue growth for FY26.

But there’s also a chance that the £12bn-cap might deliver a far lower return going forward. Risks include it becoming overly dependent on acquisitions to fuel growth. Even if this doesn’t happen, management may end up overpaying, or there could always be issues with integration.

As the last couple of years have shown, investors can also fall out of love with expensive growth stocks (albeit temporarily) when prices rise. And prices are rising again.

For these reasons, I reckon it’s prudent to invest that £20,000 into a group of, say, 10-15 high-quality stocks rather than just one. This diversification will very likely lead to a lower rate of compound growth but it will also allow for sleep-filled nights.

The post £20,000 in savings? Here’s how to target £1,221 a month in passive income appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Halma Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.