Can you realistically target a passive income totalling thousands of pounds a month simply from the dividends paid by a Stocks and Shares ISA? The short answer is yes.
Here, for example, are a couple of different ways to target a monthly passive income of £2,932 from a Stocks and Shares ISA.
Explaining some basic assumptions
In both examples I presume either a compound annual growth rate of 7% or a dividend yield of 7%.
A compound annual growth rate consists of any dividends paid plus share price growth, though share price declines could eat into it. Is a 7% goal realistic when the current FTSE 100 dividend yield is hovering close to 3%?
I think so, whether for compound annual growth or dividend yield, if someone carefully chooses the right blue-chip shares. Of course, dealing costs, fees and charges could eat into returns, so it is important to select a well-chosen Stocks and Shares ISA too.
Starting with a lump sum
Generating £2,932 of dividends a month on average at a 7% yield would need an ISA worth close to £503k. If someone had an ISA that big – and some actually do – they could get going immediately.
Taking the slow and steady approach
For those who do not have such a large ISA already – or perhaps none at all – there is fortunately a different approach. Putting £20k a year into the ISA and compounding it at 7% annually, after 15 years it should be big enough that a 7% dividend yield would mean the investor could then hit the passive income target I mentioned.
Yes, this is a long-term approach to investing. But I do not think waiting 15 years is unreasonable to go from a standing start to hopefully earning thousands of pounds each month.
Why bother with an ISA?
The above approach could work with a standard share-dealing account, incidentally. So why have I focused on the ISA opportunity?
The ISA allows capital gains or dividends inside the ISA to compound tax-free. That’s why!
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.
A 7.4%-yielding share to consider
One share I think investors ought to consider at the moment is FTSE 100 financial services company Standard Life (LSE: SDLF).
It has what is known as a progressive dividend policy, meaning it aims to grow its payout per share each year. It has done just that in recent years and so the current dividend yield is 7.4%.
There is no guarantee that dividends will last at any company though. Standard Life faces multiple risks. It manages hundreds of billions of pounds in assets and when those change in value it can sometimes force the firm to write their value down, hurting earnings.
For example, the company’s mortgage book valuation could potentially need to be written down in value if the property market slumps.
Still, with multiple long-established brands, deep financial markets expertise and a customer base that equates to one in five British adults, I see a lot to like here.
