A Stocks and Shares ISA is a brilliant way to generate passive income – by which I mean money people don’t have to work for.
By the time most of us hit 40, we’ve realised two things: time flies and work sucks. Okay, not all work sucks, but some does, and it would be nice to avoid that type if possible. Investors who have a second income have that power.
Possibly the easiest method of building a passive income is to invest in FTSE 100 dividend-paying shares.
How to retire on FTSE 100 shares
Most people don’t have enough money to tuck away all at once, but by drip-feeding in small amounts every month and reinvesting the dividends, the capital can build nicely over time.
Let’s say an investor started putting £250 a month into a Stocks and Shares ISA from age 40. That’s £3,000 a year.
Not pocket change, but manageable for many. Starting at 40 and retiring at 67 gives 27 years of investing.
Assuming a reasonable annual return of 7%, which is roughly the long-term average of the FTSE 100, that pot could snowball to £239,000 by retirement.
Now let’s say that pot threw off a 5% yield. That’s a second income of £11,950 a year, or about £995 a month. And all without touching the capital.
Stock markets are all over the place right now, thanks to Donald Trump’s tariffs, but this could also be a tempting time for far-sighted investors to snap up some FTSE 100 bargains.
A good example is insurance giant Aviva (LSE: AV.). It’s got caught up in current woes, inevitably, with the share price down 12% in the last week. Over 12 months, it’s pretty flat, but it’s up 93% over five years.
The stock also comes with a trailing yield of 6.88%. Factor in reinvested dividends, and the total return could be closer to 150%. Not too shabby.
Don’t be fooled though. This is a tricky time to invest in any stock, Aviva included.
Last year, Aviva boasted £198bn of assets under management. That’s likely to have shrunk during the current craziness. That matters, because those assets help cover insurance risks. A recession triggered by Trump’s tariff war could hurt earnings, too.
A brilliant dividend but not guaranteed
February’s results were encouraging. Aviva reported a 20% rise in operating profit to £1.77bn, and hiked its dividend 7% to 35.7p.
CEO Amanda Blanc said the company had “completely transformed” over the past four years and was “in great shape” for the next phase.
That optimism is great, but the next phase is starting out badly as Trump triggers turmoil, so investors should take those results with a pinch of salt.
And while that 6.88% yield is eye-catching, it may not hold up if profits fall sharply. Also worth noting: with a price-to-earnings ratio over 20, Aviva’s not especially cheap.
I think Aviva is worth considering for long-term investors who can face down the current volatility. No share should be picked in isolation though. It needs to sit comfortably in a well-diversified portfolio of 15 to 20 holdings.
For me, £250 a month into an ISA isn’t just investing – it’s buying future freedom. Especially if it helps lock in a retirement income around £12k a year.
