Substantial passive income is the dream of many investors, and an ISA offers one of the most tax-efficient ways to build it over time. With no tax on dividends or capital gains, it’s an ideal home for a long-term income portfolio. But how large does that ISA need to be to deliver £30,000 a year?
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.
Dividends and yields
That £30k is a meaty income. It works out at £2,500 a month. And that’s on top of the State Pension, and any other pensions. To work out how much capital is required, the starting point is dividend yield. This is the annual income generated by a share, expressed as a percentage of its price. If an investor could achieve an average yield of 6%, they could generate £30k a year from a £500,000 portfolio.
The FTSE 100 currently yields around 3%, although higher yields are available with careful stock selection. A 6% average feels achievable today without taking excessive risk. If the portfolio generates a lower 5% yield, the target climbs to £600,000.
Reaching £500k requires time, patience and consistency. Someone who contributes their full £20,000 Stocks and Shares ISA allowance each year and reinvests their dividends could get there faster than some might think.
Assuming a 7% average annual return, a portfolio could grow to around £500k in 15 years. That’s not guaranteed, but it shows what’s possible with regular investing and compounding.
Even smaller contributions can build meaningful sums over longer periods. The key is sticking with the plan and letting returns accumulate.
Diversification also matters. Spreading investments across a range of sectors helps reduce risk and smooth returns over time.
British American Tobacco shares are tempting
One stock that might fit into an income portfolio is British American Tobacco (LSE: BATS). It has delivered both growth and income for decades, and its dividend record is particularly strong. The company has increased its payout every year this millennium.
The shares have held up relatively well during Iran conflict volatiliity. They’re down 4.5% over the past month, but still up more than 40% over one year and almost 85% over two. Long-term investors will be comfortably ahead, with dividends on top.
The recent dip has made the valuation slightly more attractive. The shares trade on a modest forward price-to-earnings ratio of 13.1, while the yield has edged higher to 5.45%. Forecasts suggest this could rise to 5.69% this year and 5.86% in 2027. That shows the value of regular dividend increases.
There are risks. Tobacco faces constant regulatory pressure, health concerns and growing restrictions on newer products such as vapes. Competition remains intense. Some investors may understandably prefer to avoid the sector altogether. For those comfortable with the sector and the risks, it could be a stock to consider as part of a diversified income strategy.
A balanced portfolio of shares like this one can generate a rising income stream over time, all sheltered within an ISA. With markets unsettled, there are plenty of attractive dividend stocks available today, offering a blend of passive income and long-term growth.
