Aiming for £2,000 of monthly passive income? Here’s an ISA strategy that could help

For many of us, passive income is the holy grail of investing. It gives us hope of working less, spending more time with family and taking some extra holidays. So, what would it take to earn a £2,000 monthly passive income?

The simple maths here might be daunting at first. Even with a 5% yield, an investor would need around £480,000 invested in order to achieve £24,000 annually or £2,000 monthly.

However, this is path well-trodden by thousands of UK investors. And the first part is building a portfolio worth £480,000, ideally within an ISA wrapper to reap the tax-free benefits.

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.

Building a £480k portfolio

Building a £480,000 portfolio is a journey that requires patience, discipline, and a well-crafted strategy. The power of compound interest plays a pivotal role in this endeavour. By leveraging consistent investments and allowing time to work in favour of the portfolio, even modest monthly contributions can grow significantly over the years. Moreover, by maximising the ISA contributions, investors avoid capital gains tax (CGT) on growth and income tax on dividends. This helps preserving returns that would otherwise lose between 8.75% and 39.35% to HMRC.

So, here’s the practical bit. A monthly £500 investment in an S&P 500 ETF (historically 12.5% annual returns) could grow to £480k in 19.5 years. Alternatively, a more cautious portfolio that could include things like mature UK dividend payers, growing at 7% annually, would take 27 years to hit that £480k mark.

Consistency and sensibility

Consistency is paramount. Regular contributions, even during market downturns, often yield better long-term results than attempting to time the market. By maintaining a steady investment pace and allowing time to compound returns, the £480,000 target becomes a more achievable milestone on the path to financial freedom.

A diversified portfolio is essential for balancing growth and income. This might include a mix of low-cost index funds, dividend-paying stocks, and growth-oriented companies. As the portfolio grows, reinvesting dividends can accelerate progress, creating a snowball effect that propels the investor closer to the target.

This trust could help

One investment opportunity to consider that may help achieve the above growth is Scottish Mortgage Investment Trust (LSE:SMT) This investment trust offers investors exposure to a diverse portfolio of high-growth, innovative companies, both public and private. With a focus on disruptive technologies and long-term growth potential, Scottish Mortgage has historically outperformed the FTSE 100, delivering an average annual return of 15% between 2015 and January of this year. That compares favourably to the Footsie’s 6.3%.

The trust’s holdings in tech giants like Nvidia, Amazon, and Meta, alongside private companies such as SpaceX, provide investors with access to cutting-edge sectors and non-listed opportunities. This diversification across dozens of different tech shares and trusts can potentially drive significant long-term growth.

However, investors should be aware of the risks associated with Scottish Mortgage’s use of gearing. While borrowing to invest can amplify returns in positive markets, it can also magnify losses if investments underperform. The trust’s gearing policy allows borrowing up to 30% of its value, which increases potential volatility.

Nonetheless, it’s a trust I believe in. It’s well represented across mine and my daughter’s portfolios. I’ve been topping up.