If my goal is to generate £10,000 a year in passive income from my ISA, then I’m in luck. That’s because history has shown that it’s achievable through investing in FTSE 100 stocks.
It just requires a long-term mindset and a disciplined investment strategy. By committing £675 a month to the stock market, I can gradually build towards a very substantial portfolio over time.
Total returns
According to IG, the FTSE 100 delivered an average total return of 7.5% per year from 1984 to 2022. That figure includes dividends being reinvested. Failure to do so would have resulted in a return of only 5.4% per year, according to the same source.
So, this proves that dividend reinvestment can be a powerful tool for investors to use to accelerate wealth accumulation. By reinvesting dividends back into the market, I can take advantage of compounding returns and grow my portfolio at a faster rate.
And the sooner I grow my portfolio, the quicker I can look to generate very attractive sums of passive income.
Many investment platforms now offer dividend reinvestment plans. These allow investors to automatically reinvest dividends in additional shares, often at a discounted price.
Passive income generation
While generating £10,000 of passive income is an ambitious goal, I can make it a reality by investing regularly.
For example, if I were to invest £8,100 each year (or £675 a month) in FTSE 100 shares, I’d have £215,920 after 15 years. That’s assuming I earned the index’s average annualised return of 7.5%.
| YEAR | ACCRUED INTEREST | BALANCE |
| 1 | £0 | £8,100 |
| 5 | £6,795 | £47,285 |
| 10 | £35,030 | £116,030 |
| 12 | £54,373 | £151,573 |
| 15 | £94,421 | £215,920 |
Of course, the historical average isn’t guaranteed moving forward. It could be less (or more) in future.
But I find the possibility of going from nothing to this potential figure in a decade-and-a-half very inspiring. No wonder it’s often called the miracle of compounding!
Switching to individual stocks
After reaching this target, I could stop reinvesting dividends and choose to live off the passive income instead.
Today, the FTSE 100 yields 3.7%. So my figure would generate annual passive income of just under £8,000.
But if I instead switched to investing in a basket of market-beating dividend stocks, I could generate £10,000 (or more). To achieve this, I’d need to find income stocks with an average yield of 4.7%.
Of course, nobody knows which stocks will be yielding what amount in 15 years time. But at present, there are numerous stocks paying market-thumping dividends.
Here’s a very small snapshot, demonstrating how it’s possible to find stocks currently yielding way more than 3.7% (or even 4.7%).
| FSTE 100 STOCK | DIVIDEND YIELD |
| Vodafone | 10.47% |
| Taylor Wimpey | 8.58% |
| Legal & General | 8.41% |
| Glencore | 7.35% |
| Lloyds | 5.33% |
Now, it would be crucial for me to build a diversified portfolio of quality Footsie shares. This would reduce the impact that any dividend cancellation (which is always possible) could have on my overall income.
Fortunately, as we’ve seen, the FTSE 100 has ultra-high-yield dividend stocks across many different industries. These include banking, insurance, mining, telecoms, and the housebuilding sector.
These industries form the backbone of developed economies right across the globe. I don’t see that changing any time soon.
