One of the best ways to make money passively is through long-term investing in the stock market. Over time the S&P 500 has produced close to a 10% return on average. That said, just how much do you need to invest to make £5000 per month?
We’re going to take a look at how much you would need to invest in the stock market as well as three other investment vehicles to generate £5000.
Quick Overview
To generate approximately £5,000 per month through investing in the stock market you would need a portfolio £1.5 Million. You would need £2.4 Million if you wanted to generate income solely from dividends and were investing all of the money today. You can generate £5,000 per month through other investments such as property and businesses with much less capital.
Stock Market Investing
Investing in the stock market is one of the most popular ways to generate passive monthly income. Other than a high-interest savings account, it’s probably the most hands-off way to invest.
There are multiple types of investing but the two we’re going to discuss here are Dividend Investing and Index Fund Investing.
Dividend Investing
A dividend investing strategy involves building an investment portfolio of companies that pay out dividends. A dividend is a portion of company profits paid out to investors usually on a quarterly basis.
The dividend amount will usually range from 1% to around 5% of the company’s share price. This is known as dividend yield. You will find some companies that pay out larger dividends than this but an extremely high yield can often signal significant risk with a stock.
A well-diversified dividend portfolio will have an average starting yield of around 2.5%. If you want to earn £5,000 per month you need to be generating £60,000 per year in dividends. To generate £5,000 per month at a 2.5% yield you would need a portfolio of £2.5 Million.
If you invest over a long period of time, your dividend yield on cost will be higher than 2.5% if you have re-invested dividends. Buy a stock that pays a dividend and re-invest the dividend in the stock. The next dividend will then be higher meaning your yield on cost increases over time. When you do this for months and years, you get a fly-wheel effect that grows your yield on cost.
For example, if I buy £10,000 of McDonald’s stock at a 2.5% dividend yield I would receive £250 in dividends in the first year. If I then re-invest that £250 into Mcdonalds the next year you would have £10,250. In the second year, you would receive £256.25 in dividends. Your yield on cost has increased from 2.5% to 2.56%. Over long periods of time, this compounds and your yield on cost will grow.
This example is oversimplified to illustrate the point. When you own a stock the price will change on a daily basis causing the dividend yield to fluctuate. Companies can also increase or decrease their dividend giving you a higher or lower yield on your cost.
If you’re you’re looking to invest now so you can earn £5,000 per month in retirement and have decades ahead of you, investing small amounts monthly in a dividend portfolio will get you there while contributing much less than £2.4 Million to the actual portfolio.
Your portfolio could also be growing significantly during this period as well as generating these dividends.
Invest In Index Funds
An alternative to investing in individual stocks is investing in Index funds. An index fund is a portfolio of stocks that tracks a financial market index such as the S&P 500.
Over the past 50 years, the S&P 500 has returned an average of approximately 10% per year. This means that you would need to have £600,000 invested to earn £5,000 per month in returns. However, this isn’t a very safe strategy. 10% is an average. Some years will perform worse and others will perform better.
If you pull out £60,000 in your first year but the market only returns 3% that year, your portfolio has decreased below its starting value.
- £600,000 invested in the first year
- Grows 3% giving you a balance of £618,000
- You withdraw £60,000 to get your £5,000 per month
- The second-year starting balance is now £562,000. A 10% return here would only generate you £56,200. You can see how you might start to run out of money fairly quickly.
To combat this you should follow the 4% safe withdrawal rule. This is a popular rule from the FIRE movement.
With the 4% rule, you can safely withdraw 4% from your portfolio each year for 30 years without the balance running out.
We need £60,000 in annual income to get our £5,000 per month. Using the 4% rule we time’s £60,000 by 25.
£60,000 x 25 = £1,500,000
This means we would need a portfolio value of £1,500,000 to safely withdraw £5,000 per month.
Want To Start Investing?
If you want to start investing, check out our top investment platforms:
|
Best Zero Commission Platform
|
Best Managed Platform
|
Most Trustworthy Platform
|
Cheapest Provider For ETF Investing
|
Best For Trading
|
|
Type:
Self Managed
|
Type:
Managed
|
Type:
Self Managed
|
Type:
Self Managed/Managed
|
Type:
Self Managed
|
|
4.8
|
4.0
|
4.5
|
5.0
|
3.5
|
|
Minimum Deposit:
£1
|
Minimum Deposit:
£500
|
Minimum Deposit:
£1
|
Minimum Deposit:
£100
|
Minimum Deposit:
$10
|
|
|
|
|
|
Property Investing
Property investing is a popular way for many investors to put their money to work in the UK. If you have cash on hand to buy a property, you can generate monthly cash flow through renting.
The average rental yield in the UK is 5.41%. For every £100,000 you invest, you would earn £5,410 in rental income. However, we also have to factor in upkeep costs of a property. This could be another 1.5% per year leaving you with a rental yield of 3.91%.
To earn £5,000 per month or £60,000 per year, you would need to own £1,534,526 in property value.
There are some places in the UK which are currently generating higher yields such as Swindon – 5.4%, Nottingham – 6.49%, Hartlepool – 7.64% and many more.
If you can purchase properties with higher yields you won’t need to invest as much capital to reach your goal of £5,000 per month.
Invest In An Online Business
Online businesses are a great way to invest your cash and start generating a return on your investment. There are many different business models available such as e-commerce, Amazon FBA, content businesses or Software as a Service.
Content websites are personally one of my favorite business models. This website right here is a content business. We produce content and make money from affiliate partners and advertising.
You can find content businesses for sale on a few different platforms:
- Flippa
- Motion Invest
- Empire Flippers
- FE International
Content businesses generally sell for 36x their monthly profit. If you’re looking to earn £5,000 per month you will have to invest approximately £180,000 to purchase a site.
That may seem low compared to some of the other methods mentioned here and that’s because it comes with a lot more risk and work. While content sites can be reasonably passive if you have writers, it still takes up more time than most of these other examples.
You’re also at risk of the platforms you build on top of. For example, google sends us a lot of visitors to this site but they can make an algorithm change and cut our visitors in half overnight.
That said, when you purchase a business, you have the opportunity to grow it past the £5,000 it was making when you purchased it. You are in full control of your investment and can make decisions that will grow your capital much faster than if it was invested in Index funds.
So, online businesses earn a much higher yield than other assets mentioned here however they also come with a lot more added risk. That said, you can start your own content site for less than £10 and write your own content until the site starts making money.
High-Interest Savings Account
For the past decade, this hasn’t really been a viable option as interest rates were so low. That’s now changed. In 2023 we saw a large increase in rates which is continuing into 2024. We are seeing interest rates on high-interest savings accounts hit 4-5% and even more for some fixed-interest deals.
Currently, I use Chip which is getting me 4.84% in interest. While it’s not comparable to the Stock Markets average returns it comes with much less risk.
Chip is an award-winning savings and investment app. They became popular with their high-interest savings account but also offer investment services and automatic saving.
- Market leading interest rates
- Easy to use app
- £85,000 Protected by FSCS
- 45p Per Autosave
- Limited Range Of Investment Products
To earn £60,000 per year (£5,000/month) in interest payments you would need to have £1,239,669 in a chip savings account.
That’s quite a chunk of change but this method does come with the lowest amount of risk. You’re also at risk that rates will once again be lowered so your returns may be short lived.
Final Thoughts
These are all great ways to make money through investments. The route you take will depend on the amount of time you want to dedicate towards the investment and how much risk you’re willing to take on. Real Estate and online businesses are the most high-maintenance investments while stocks and high-interest savings accounts can be fairly passive methods of investing.
Read More From Money Sprout:
