How I’d earn £250 a month from a Stocks and Shares ISA

Just how big of a Stocks and Shares ISA, and what dividend yield would I need, to generate £250 a month in passive income?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Shot of a senior man drinking coffee and looking thoughtfully out of a window

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Rising bank rates mean that some Cash ISAs offer around 4% fixed for a year. But, given the long-term decline in rates over the last decade, I can’t be confident of that kind of return lasting. For long-term income building, I’d still plump for a Stocks and Shares ISA.

Build a portfolio first

Before I can draw a meaningful income I need to build my portfolio. At the moment I am paying as much as I can afford into my Stocks and Shares ISA and buying a mix of dividend and growth stocks. I am reinvesting any dividends I receive. When it is time to start taking an income, I will start withdrawing those dividends instead of reinvesting them. But, what kind of returns should I expect as I build my portfolio?

Well, according to IG Group, FTSE 100 total returns have averaged 7.75% per year since its inception. That includes the effect of dividend reinvestment.

I do need to be aware that historical performance is no guarantee of future performance. And, I need to plan for the long-term, if I am using a long-term average rate like this. Also, my portfolio should look something like the FTSE 100, if I am using a rate based on the performance of that index.

Dividend stock yields

Before I start working out how much I should regularly invest and for how long, I need a target. How big of a portfolio, and what kind of dividend yield will generate an income equivalent to £250 per month, or £3,000 per year?

Well, the average dividend yield of the FTSE 100 is around 3.5%. I would hope I could get that closer to 4% with some careful stock picking.

Stocks and Shares ISA ValueRequired annual yield to generate £250 monthly income

A £75,000 portfolio yielding 4% will generate £3,000 a year in dividends, which will satisfy that £250 per month income requirement. But I am not done with the maths yet. Now I need to establish how much I would need to invest, and for how many years at that assumed 7.75% rate, to hit £75,000 or more.

Stocks and Shares ISA income

With the help of Excel’s future value function, I discovered that investing £50 a month for 25 years won’t do it. However, £100 a month for 25 years is predicted to build an £88,274 portfolio, which is more than enough to generate £250 in monthly dividend income assuming a 4% dividend yield.

Assumes 7.75% per annum. Successes, meaning values over £75,000, are shown in green.

Investing £150 a month for 20 years would also do the job. So, I have options. But now comes the hard part. I need to keep investing regularly in a basket of quality growth and dividend stocks for the long term and hopefully one day I can sit back and enjoy a steady stream of passive income from my Stocks and Shares ISA.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James McCombie has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mixed-race female couple enjoying themselves on a walk
Investing Articles

A once-in-a-decade chance to get rich buying growth stocks?

We haven't seen a good spell for growth stocks for quite a few years now. But I reckon the signs…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

The FTSE 100 is full of bargains! Here’s 1 stock I’m eyeing up

A weak economic outlook has hurt the FTSE 100. This Fool explains why she likes the look of this consumer…

Read more »

Investing Articles

2 no-brainer beginner FTSE 100 stocks to buy for my portfolio

Getting started with investing can be daunting. Here are two stocks for beginners to consider buying to build their first…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 recession-resistant UK shares investors should consider buying

Our writer details two UK shares she feels could withstand some of the ill-effects of the current malaise to provide…

Read more »

Tanker coming in to dock in calm waters and a clear sunset
Investing Articles

Glencore share price drops on results. Time to buy?

The Glencore share price wobbled a bit after a weak set of 2023 results. Here's why I have the stock…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Big trouble in China sinks HSBC shares. Should I invest after record FY results?

HSBC shares have slumped following a disappointing end to 2023 for the FTSE stock. Royston Wild explains why this may…

Read more »

View of Tower Bridge in Autumn
Investing Articles

3 dirt cheap FTSE 100 shares to snap up today?

The FTSE 100 is rallying, but many shares still look super cheap on fundamentals. Is our writer buying these three…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

FTSE 100 earnings: what can we expect from Rolls-Royce in 2024?

The Rolls-Royce share price tripled in 2023. Roland Head wonders whether this FTSE 100 stock could continue that impressive trajectory…

Read more »