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?

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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
£150,0002%
£100,0003%
£75,0004%
£60,0005%
£50,0006%
£42,5007%
£37,5008%
£33,3339%
£30,00010%

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.

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