£25k savings? Consider earning £1,000 or more in monthly passive income with this strategy.

Buying and holding high-quality blue chip stocks is a popular tactic for generating reliable passive income. After all, these are some of the most mature businesses on the stock market, with stable cash flows and profits. As such, they are often a lucrative source of stable dividends for decades to come.

London Stock Exchange is home to a wide range of these businesses, many of which now sit comfortably in FTS 100. And if left alone, a modest blue-chip portfolio can turn into a solid investment.

In fact, starting with just £25,000 is more than enough to get you started on the path to passively earning an extra £1,000 every month.

Using Blue Chip Stocks

Despite the bleak growth outlook, large-cap stocks are still generating significant returns. Since its inception, the UK’s leading large-cap index has delivered an average total return of around 8% per year, half of which typically comes from dividends.

However, investors who successfully selected individual successful businesses rather than relying on an index fund did significantly better. For example, AstraZenecahas an annualized return of 11.3% over the past 10 years. Meanwhile, RELKS reached about 13%, while Experian over the same period it will be even higher and amount to 15.7%.

Combined, this represents a 13.3% average annual return on both capital gains and shareholder distributions. While a 5.3% difference doesn’t sound like much, when added up over decades it makes a huge difference.

To demonstrate that £25,000 invested at 8% per annum for 20 years would amount to a portfolio worth £123,170. That’s not bad. But that pales in comparison to the £352,215 the stock picker earned. And subject to the 4% withdrawal rule, that’s the difference between earning £410 a month and £1,174.

Risks and rewards of stock selection

We’ve already seen how you can make just a few extra percentage points of profit each year from stock picking. But unfortunately, this better performance comes at the cost of higher risk.

After all, not all stocks rise, and there have been plenty of blue chip losers over the past decade. BT Group(LSE:BT.A) is a perfect example of this, with an average annual loss of 5.2%.

To avoid falling into these traps, investors must be informed and make smart decisions. Let’s look at BT again. The investment thesis back in 2014 was about rolling out fiber across the UK and capitalizing on 4G and eventually 5G.

This sounded reliable given that almost all telecoms companies depend on BT’s infrastructure. At first, things seemed to be going well: in 2015 alone, the share price increased by 16%. But the situation quickly deteriorated as the cost of upgrading the infrastructure became known.

BT’s debt has skyrocketed, forcing the business to raise prices while its rivals could remain competitive. The company lost market share and its debt burden continues to this day.

To be fair, management is finally starting to make progress on reducing leverage. And the rapid rollout of 5G and fiber over the past two years will enable the company to return to growth and generate £3 billion of annual free cash flow until 2030. In other words, BT’s story is far from over, but there may be much better opportunities ahead. somewhere else, I feel.