With a £10,000 ISA, an investor could generate a passive income. The issue is, it wouldn’t be very large. In fact, I’d suggest the maximum sustainable yield would be around £800 a year, utilising the type of dividends that insurers and tobacco companies pay.
However, this type of income is unlikely to be life-changing. Instead, an investor could look to reinvest their dividends, or invest in growth-oriented companies that forgo a dividend in favour of investing in the future. Here’s how it could look.
Building a portfolio
In reality, while strong dividend yields can change the equation, I believe an investor needs around £200,000 invested to earn £10,000 annually in the form of passive income from investments. That’s assuming a 5% dividend yield, which, in theory, should be much easier to achieve with a diversified portfolio.
So, how would an investor get their portfolio from £10,000 to £200,000? Well, simply, it takes time. It needs reinvestment and it would benefit from consistent contributions. Even a small amount can go a long way.
There’s lots of way to reach the same point, mathematically. One way would be assume an 8% annualised growth rate and £250 of monthly contributions. After 20 years, the investor would have £196k. That would almost be enough to generate £10,000 annually.
Of course, the more an investor can put aside, and the longer for, the more money they will have at the end of the period. Change that monthly contribution from £250 to £1,000 and the portfolio’s value at the end of the period becomes £638k. A massive increase which could, using our model, deliver more than £30,000 annually in passive income.
The investments for the strategy
Diversification is key. Many novice investors lose money, and that’s why some experts will tell newcomers to invest first in index tracking funds. That’s certainly not a bad idea. After this, investors may want to consider more tailored investments, things they know or things they keep track on.
For me, one of those companies in Alphabet (NASDAQ:GOOGL). It could help me grow my portfolio over time. The company remains an attractive investment despite slowing US growth and Trump’s tariffs, especially after a strong first quarter in 2025.
Despite a roughly 20% year-to-date share price decline, the company reported 12% year-on-year revenue growth and a 46% surge in net income, driven by strong performances in Google Search and YouTube, and rapid expansion in Google Cloud2.
Alphabet’s aggressive push into artificial intelligence (AI), particularly with the rollout of Gemini 2.5, is enhancing its core platforms and positioning it at the forefront of the AI revolution. The company’s ongoing $70bn share buyback programme signals management’s confidence in the stock’s undervaluation and future prospects.
Alphabet also trades at a forward price-to-earnings (P/E) ratio of 17, making it one of the cheapest ‘Magnificent Seven’ tech stocks. This also represents a 33% discount to the company’s five-year average P/E.
Nonetheless, it’s not without its risks. AI-driven search is changing user behaviour and has led to intensifying competition from new rivals like OpenAI. What’s more, the company may see lower demand for advertising services if US growth continues to slow.
Despite these risks, I believe the stock currently represents excellent value. I made my first investment in Alphabet last month.
