If I wanted to create a lifelong passive income of £2,000 per month, what type of stock could help me achieve it with the smallest starting stake?
Well, living in the UK provides easy access to one of the largest stock markets in the world. Across the London Stock Exchange, I can peruse thousands of businesses with big earning potential.
London might be the best destination in the world for income stocks. Plenty of firms pay out 8% or more right now. Some pay as high as 30%. If I snaffle up a few world-class dividend stocks I could build a passive income near instantly.
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An investment
Now, while I budget in months, businesses tend to work in years. So rather than a £2,000 a month goal, I’ll need to think about targeting £24,000 a year. And at an 8% return, I’d need to stump up £300k.
Well, let’s take a quick breather as that’s quite a lot of money. I don’t have a few hundred thousand pounds hiding under my mattress, sadly. I’ll need a different route to my goal.
Instead, I could pool the £12k savings I have and invest wisely. I won’t be fixated on the next year’s dividend, I’d treat the stocks I buy like an investment, like I’m a part owner in a growing business – which of course I am.
One common strategy is to be a contrarian. Rather than following the market herd, I could hunt out-of-favour stocks. These beaten-down companies often prove to be cheap buys.
Cheap buy
Take Imperial Brands (LSE: IMB) for example. This FTSE 100 stock yields around 8% right now, although that’s not what I’d be looking at. I’d be looking at the business itself.
Imperial sells cigarettes. I wouldn’t blame anyone who doesn’t like the idea of buying into a tobacco stock. Smoking is in decline. The health effects are well known. Some governments are even trying to ban it. There’s also the ethical issue of profiting from a ‘sin stock’.
But none of this is new. Cigarette use has been declining since the 1970s. Investors have avoided the stock since then, and this is where contrarians could have netted one of the best stock market investments in recent years.
Had I invested in Imperial in 1996, I would have watched my starting capital increase by 2,395% (by reinvesting dividends). The contrarian option would have handed me above-market returns of an annualised 13.5%.
If I had invested £12,024 then it would have grown to the required £300k amount. And with a forecast 7.8% yield for 2024, I’d expect to receive £1,950 monthly passive income – pretty close to my goal.
Of course, the past is the past. It’s tricky to predict which stocks will win out in the long run.
In general though, when everyone is going one way, it can pay to go the other. I suspect tobacco is still an undervalued contrarian play although I don’t have a position in Imperial specifically.
The stock market has countless examples like this — unloved companies that make achieving a goal like a £2k monthly passive income from a surprisingly small starting stake. I don’t doubt for a second a few great contrarian stocks are out there at the moment.
