How much passive income could I earn by putting £380 a month into a Stocks and Shares ISA?

Christopher Ruane explains how he’d aim to turn a Stocks and Shares ISA into four-figure passive income streams each year.

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A Stocks and Shares ISA lets me buy into brilliant dividend-paying companies in the UK and beyond.

Depending on how much I put into such an ISA and the investment decisions I make, I think it could well be a passive income machine.

To illustrate, let’s imagine that I put £380 each month into my ISA.

How to calculate dividend income streams

The amount of passive income I would earn depends on how much I invest and what average dividend yield I earn.

Yield is basically what I earn in dividends each year expressed as a percentage of what I paid for the shares.

Putting £380 a month into a Stocks and Shares ISA for a year would mean I had £4,560 to invest. At a yield of around 4% (slightly higher than the FTSE 100 average), that ought to earn me passive income of around £182 per year.

Three ways to boost my income

But that is only the start!

If I kept putting £380 a month into my ISA, I ought to earn more. I should still be earning any dividends declared from shares I had bought in previous years, as long as I held on to them.

I could also reinvest my dividends, instead of taking them as cash. That is known as compounding.

A third move would be to raise my average dividend yield.

To illustrate, imagine that I put £380 each month into my Stocks and Shares ISA at an average yield of 8% and compounded the dividends. At the end of the five-year period, I would be earning over £2,200 annually in passive income. That equals over £40 a week.

Focus on quality

Keeping up my regular contributions and compounding the dividends? I would definitely aim to do that if my finances allowed.

As for an 8% average yield though, things are less clear cut.

Dividends are never guaranteed. Sometimes a high dividend can signal an elevated risk of a cut. Vodafone yields 10.3% — but it has announced plans to halve the payout per share.

Still, I think an 8% average yield from blue-chip shares is possible in today’s market. But that would not be my starting point.

Instead, I would focus on companies I think have an edge in markets I expect to experience resilient customer demand – and that have an attractive share price.

One share I’m eyeing

An example I would consider buying for my Stocks and Shares ISA is Legal & General. The FTSE 100 financial services provider has a yield of 8.3%.

It is highly cash generative thanks to a well-known brand and large customer base helping it compete convincingly in the lucrative pensions market. We are all always getting older, so I expect pensions to remain big business far into the future.

Legal & General has cut its dividend before. That happened in 2008, as turbulent financial markets threatened its returns. The same could happen again if markets tumble and policyholders withdraw funds.

As a long-term investor though, I feel Legal & General is the sort of share that could help turn my Stocks and Shares ISA into a passive income machine.

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.

C Ruane has positions in Vodafone Group Public. The Motley Fool UK has recommended Vodafone Group Public. 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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