Stocks and Shares ISAs can be brilliant passive income vehicles. With access to dividend stocks and other income investments and no tax on income or gains, one can potentially generate a lot of cash flow.
But how much do you need in an ISA to generate a decent amount of income? I’m not talking about £100 or £200 here and there, but more like £5,000 a month. Let’s take a look.
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A complex question
This is actually a really hard question to answer. Because there are so many variables to consider.
For example, are we talking about £5,000 per month today or £5,000 in 10 years’ time? Because these are two different things.
Assuming inflation runs at 3% per year for the next decade, £5,000 in 2035 would only have the purchasing power of about £3,700 today.
Then, we need to consider dividend yields. Today, there are lots of stocks on the London Stock Exchange with yields of 6% or more so it’s possible to build a portfolio yielding 6%.
But this might not be the case in a decade’s time. Today, more companies are opting for share buybacks instead of dividends.
Keeping things simple
Let’s keep things simple, though.
Let’s ignore inflation for now and say that one is simply looking for £5,000 a month in passive income.
And let’s also say that lots of UK dividend stocks yield 6% and higher indefinitely and that it’s possible to create a portfolio yielding 6% (without touching the capital).
In this scenario, one would need a million pound ISA to generate £5,000 per month in income.
Aiming for ISA millionaire status
Now, that obviously sounds like a lot of money to build up in an ISA. And it is.
But plenty of people have done it. Across the UK today, there are thousands of ‘ISA millionaires.’
What’s needed to get there? A combination of discipline (regular saving), patience, and most importantly, a sound investment strategy.
Put these three things together, and anything’s possible.
A sound investment strategy
Now, a sound investment strategy is going to mean different things to different people. For me, though, it’s a combination of funds and individual stocks, held for the long term.
I see funds as a good foundation for a portfolio. Stocks are like the icing on the cake – they can be used to target higher returns.
An example of a fund I like is the Vanguard All-World UCITS ETF (LSE: VWRP). This is a low-cost global index fund.
With this product, one gets access to over 3,600 stocks. And all the big names like Apple, Nvidia, and Tesla are in the fund.
This fund was only launched in mid-2019. So, it doesn’t have a long-term track record.
However, it has done well since launch, returning about 90% in total. That’s almost 11% per year.
Past performance isn’t an indicator of future returns, of course. Looking ahead, a global economic crisis could lead to much lower returns.
All things considered, however, I think it’s worth a look as a core holding. Fees are just 0.22% per year.
Turning to stocks, there are plenty of good ones out there today. Some names that could be worth considering include Amazon, Alphabet, and Intuitive Surgical.
Over the last decade, these stocks have all returned more than 20% a year. Again, though, past performance isn’t an indicator of future returns.
