If an investor is going to earn passive income on their investments, there’s a strong argument for holding them in a Stocks and Shares ISA. This way, all of that lovely cash that companies throw out is shielded from HMRC’s fingers.
In theory, choosing to re-invest rather than spend this money should allow this person’s wealth to compound at a higher rate, hopefully leaving them with a lovely pot to start drawing from later down the line, either to supplement existing income or replace it.
But how big a pot would someone eventually need to have to target £2,000 per month?
Well, it all depends on what they own.
A cheap solution
One way of generating a second income would be to invest in cheap index or exchanged-traded funds. As it sounds, these track a particular index — such as the FTSE 100 — rather than attempting to outperform it (or ‘beat the market’).
But as well as tracking the market return, this fund would pay dividends. At the moment, the current yield stands at around 3.1%.
Now, a yield of this size would mean our investor would need to have a pot of £775,000 to aim for that £2,000 per month mentioned earlier. Yikes!
But there is a way of getting that amount down, albeit at greater risk. It’s through owning individual company stocks that offer more in the way of passive income.
Monster dividends
One example is Phoenix Group Holdings (LSE: PHNX).
Shares in the savings and retirement specialist have already soared 30% in 2025. In addition to delivering a set of expectation-beating half-year numbers, the market has also been impressed by the £6.7bn cap’s commitment to reducing debt.
Since a yield falls when a stock’s share price goes up, you’d expect to Phoenix’s yield to be pretty low, right? Think again.
As I type, we’re looking at a forecast dividend yield of 8.3% — over 150% more than the tracker fund. Phoenix also has a decent record of hiking its total distribution in recent years.
If my calculations are correct, this would mean an investor would need about £290,000 in their ISA to target that £2,000 per month.
That’s still a huge pot to shoot for. But definitely not as challenging as £775,000.
Too much risk for me
Despite this, I don’t think Phoenix is the only dividend stock worth considering. Indeed, relying on a single company is dangerous, regardless of its yield. Trading may fall off, pushing management to conserve cash by cutting or completely cancelling the dividend. That wouldn’t go down well with the market.
For Phoenix, it’s concerning that earnings barely cover the 2025 dividend. That’s not ideal if cash inflows dip. Increased regulation could also hit profit.
My preferred strategy
This is why building a diversified portfolio of stocks can pay off. Doing so doesn’t eliminate risk entirely.
But spreading money around makes sense, just in case some holdings fail to perform well. It should also mean that an investor’s passive income stream isn’t completely wiped out.
That would be the case regardless of how cash they’d managed to accumulate in their ISA.
