The UK stock market enjoyed a great year in 2025, with… FTSE 100 index superior to Standard & Poor’s 500 For the first time in years. This year delivers a total return of nearly 23% year-to-date, including dividends, the seventh-best year for the index since records began.

The financial, mining and healthcare sectors performed particularly well, accounting for about 40% of growth. But as interest rate cuts loom, banking stocks may lose their edge and gold growth may wane, hurting mining stocks.

So what can an investor look forward to in 2026 and how much would be needed to target £3,500 of passive income?

Looking forward

Economists and market pricing experts currently indicate that the Bank of England will cut interest rates by approximately 3.5% by mid-2026, with an initial cut expected this month (December) and another move in early 2026.

Some of the highest yielding names in the UK today are in life insurance and asset management, where cash generation is not directly linked to short-term fundamental interest rate movements.

Therefore, the finance sector still controls an important part of the investment portfolio. But before looking at which stocks to consider, let’s examine some numbers.

Trip to £3.5k per month

Aiming for a dividend income of £3.5k per month is a realistic target, which equates to £42,000 per year. This would require a portfolio worth £600,000, working out a typical average return of around 7%.

For investors who don’t have £600,000 in cash, it’s not too late to start building on it. With an initial investment of £5,000 and monthly contributions of around £500, it will take around 28 years to achieve this goal.

Of course, this is not a small amount per month and will require some limited budgeting – so the earlier you start, the better. With just £300 to contribute per month, it would take almost 35 years.

Stocks to consider

To reach an average return of 7%, investors will need to target a mix of reliable stocks with sustainable returns between 5% and 9%. Some examples include Legal and general (9%), Admiral Group (7.6%), Primary health characteristics (7.5%), Aberdeen Group (7.5%), Investec (7%), London Metric Property (6.8%), TB ICAP (LSE: TCAP) (6.5%), Imperial brands (5.9%) and OSB Group (5.7%) and Schroders (5.6%) and Rio Tinto (5%).

These are not only the companies with the highest returns, but also those with good payment records, cash coverage and low debt. For example, TP ICAP has enough cash to cover dividends 2.6 times its dividend and the dividend payments make up only 70% of earnings. Its balance sheet shows that debt is only half of equity and it has a strong return on equity (ROE) of 8.7%.

Together, these metrics reveal a company that operates efficiently, manages its debt responsibly and demonstrates a dedication to shareholder returns.

But that doesn’t mean it comes without risks. Although TP ICAP’s position in the niche market gives it a wide moat, analysts have noted the potential for AI to replace some of its products. Any major regulatory change in over-the-counter (OTC) trading rules could reduce brokerage fee profits and hurt profits.

However, with group revenue up 7% in its latest results, I remain confident in the company’s trends. As such, I think it would be an ideal stock to consider in an income-focused retirement portfolio.