A quick Google search provides many ideas for generating passive income. Suggestions include earning royalties from the writing of a book, licensing photography or creating a YouTube channel. Personally, I think there’s nothing passive about any of these money-making projects. Each requires plenty of effort before any income can be earned.
A better plan
That’s why I prefer investing in dividend shares. Although a little bit of upfront work is required to identify the best stocks to buy, thereafter (assuming everything goes to plan) minimal effort’s needed.
Personally, I like to invest using a Stocks and Shares ISA. Primarily because all income and capital gains can be earned free of tax.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
But with UK average earnings of £37,544 a year, how much would be needed in an ISA to earn this amount in passive income? The answer is… it depends.
Not all the same
That’s because there’s a huge variation in the level of dividends paid by companies. Looking at the FTSE 100, the yields currently (15 August) on offer range between 0% and 9.26%. However, investing in the top five could generate 8.25%.
Using this figure, an ISA would need to be worth £455,079 to produce an annual income equivalent to the UK’s average earnings.
| Stock | Yield (%) |
|---|---|
| Taylor Wimpey | 9.26 |
| WPP | 8.57 |
| Legal & General | 8.17 |
| Phoenix Group Holdings | 7.76 |
| M&G | 7.51 |
| Average | 8.25 |
This is a large sum but investing £500 a month for 25 years — with 8% annual growth — would be worth £457,419. Of course, £37k+ 100 will be worth a lot less in 25 years.
And when it comes to dividends there are no guarantees. They’re paid out of earnings which can be volatile. The table above is based on payments made over the past 12 months and, this month, WPP — the ad/marketing agency — said it was cutting its next interim dividend by 50%. Global uncertainty and its impact on operating profit was blamed.
But there are plenty of other Footsie stocks offering generous yields. The average for those ranked six to 10 is 6.18%.
Top of the pile
It’s also true that Taylor Wimpey (LSE:TW.) has recently trimmed its interim payout. The 13% reduction reflects “softer market conditions in the second quarter” of 2025 and an additional provision being made in its accounts to cover the increased cost of fire safety works.
The housebuilder aims to return 7.5% of net assets to shareholders each year subject to a minimum of £250m. Personally, I think there’s plenty of evidence to suggest that the group will soon be in a position to grow its dividend once more.
According to Moneyfacts, average mortgage rates have fallen below 5% for the first time since September 2022. And lending’s starting to increase again. The group’s predicting 10,400-10,800 completions (excluding joint ventures) this year compared to 9,972 in 2024.
However, a recovery in the housing market isn’t a nailed-on certainty.
The base rate — a key driver of new housing demand — is falling slower than previously anticipated and persistent inflation is affecting both consumer confidence and construction costs.
But the group retains a net cash position and had a strategic pipeline of over 126,000 plots at 29 June. And a chronic shortage of housing in the UK remains a problem.
For these reasons, as well as its above-average dividend, investors could consider adding the stock to their ISAs as they try to generate a five-figure annual passive income.
