How much you need to invest for £125 per month boost from ‘passive income’

Story by Jon King

Money earned with little to no effort from investors is said to be growing in popularity as Brits seek ways to supplement their incomes. Stocks paying dividends, bonds and savings accounts which pay a set interest rate are among the options available.

Hargreaves Lansdown says for many investors the appeal of earning from so-called “passive income” investments is “obvious”. The broker maintains that a regular income from investments could boost earnings, help with retirement plans or make a portfolio “work harder”.

It says that to earn about £125 per month would usually require a lump sum, but the size of lump sum would depend on the yield of a chosen investment.

Hal Cook, senior investment analyst, explains: “If the investment average yield is 3%, then an investor would need £50,000 to generate an annual income of £1,500 or monthly income of £125.

“The higher the average yield, the less an investor would need to invest to generate the same amount of income.

“If the average yield is 5%, then an investor would need only £30,000 for an annual income of £1,500. Yields are variable, and past performance isn’t a guide to the future.”

Mr Cook says investors can think of yield as similar to the interest rate on a savings account.

But he cautions that unlike cash savings, an investor could get back less than they invest as stock or bond markets can fall and rise in value, with no guarantees they will pay an income.

He explains that tax should be part of the consideration too, but savers can get around this with a tax-free Stocks and Shares ISA.

The analyst lists three possible funds, which he cautions will not be right for everyone. He urges Brits to invest only if a fund matches their aims, they understand the risks and the fund is part of a diverse portfolio.

Artemis High Income is the first fund listed by HL. This one invests mostly in bonds, but can also invest up to 20% in shares in the UK and Europe.

Mr Cook says: “A focus on high-yield bonds and shares that pay a dividend makes it a little different from most bond funds and a higher-risk option.

“So, the fund could be a good way to diversify a more conservative income portfolio, with the potential to increase the overall income paid.”

The second fund on HL’s list is Royal London Corporate Bond, which has a focus on investment grade bonds.

These are debt securities which have received a credit rating at or above a certain level from known rating agencies.

Mr Cook says this fund could form part of an income portfolio focused on the long term. He adds it could provide some bond exposure to a portfolio more focused on company shares.

Ninety One Diversified Income is the third fund listed by HL. Mr Cook says this one invests mainly in bonds from around the world, including government debt. It can invest in company shares too.

He adds: “We consider this fund to be a step up in risk from cash, with potential for losses, while providing a consistent income over time.”