£7,000 savings? This is my goal to achieve a passive income of almost £2,000 per month

Reaching the ultimate goal of lifelong passive income is not an easy task, but it is possible. All you need is commitment, patience and a few wise decisions.

People with significant savings have several options to consider. Investing in companies that pay dividends requires little effort (but a lot of time).

This is not a guaranteed method, but it has been successfully used by many well-known investors for years. For everything to work well, there are certain steps you need to take that can help improve your score.

Minimize your expenses

Capital gains from investments are usually taxed, so a good first step will be to find ways to minimize these costs. For UK residents, opening a Stocks and Shares ISA is one way to benefit from tax savings.

It allows you to invest up to £20,000 a year in a variety of assets tax-free on your gains. Britons can usually open such a bank through a mainstream bank or various financial institutions.

Please note that tax treatment depends on each client’s individual situation and may change in the future. The content of this article is for informational purposes only. It is not intended to be and does not constitute any form of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

Selecting stocks

A good passive income portfolio usually includes a diversified mix of growth stocks and dividend stocks. While growth stocks can potentially provide better price returns, dividends provide more reliable income. Both have their advantages.

Many investors invest in stocks across sectors and regions, reducing exposure to industry- and region-specific risks. By combining such stocks, a decent portfolio could achieve an average return of 6% with a 5% price increase.

By reinvesting dividends, investment returns can compound and grow exponentially over time. With this average investment of £7,000 this could grow to £57,840 over 20 years with a dividend of £3,200 per year. Putting an extra £100 into the investment each month would increase it to £136,000 and the annual dividend would be £7,450.

After 30 years it would have reached £411,400, paying dividends of £22,650 a year, or almost £2,000 a month.

Stocks I like

At 2% profit, AstraZeneca does not pay high dividends. However, it is a company characterized by stable growth that performs well in periods of economic downturn. This can help keep your portfolio profitable when markets fall. Tescois another reliable stock, with a yield of 3.5% and quite decent growth over the last decade.

Legal and general‘s (LSE: LGEN) is a strong dividend payer and I think it’s worth considering, even though growth has been slow recently. The company’s shares have fallen 14% over the past five years, likely due to inflationary pressures and the economic downturn.

If the economy tanks again, it could further hurt the share price and force a dividend cut. When this happened in 2008, the company cut its dividend from 6p to 4p per share. It also faces significant competition in the UK insurance industry, which could reduce its market share and threaten profits.

However, with a yield of 9%, it currently promises a steady stream of income in the form of dividends. Despite the falling share price, it has increased its dividend almost every year since 2009, at an average rate of 7.73%.

The most important thing to look for in a dividend stock is consistent growth.

With projected earnings of 327%, the company has an excellent forward price-to-earnings (P/E) ratio of 10.8. As a result, analysts have an average 12-month price target of £2.60, representing an upside of 15.7%.