Quitting work to live off passive income sounds like the ultimate dream, doesn’t it? No more alarm clocks or commutes — just dividends rolling in to cover the bills, and more..
That’s why so many UK investors tuck money into a portfolio of high-yielding dividend shares each month. And to get the most bang for buck, using a tax-free ISA can minimise how much goes to HMRC.
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 how much should you really put in each month to hit something like £21,000 a year in income?
Running the numbers
Income portfolios chasing high-yield stocks often achieve 6%-8% yields. To generate £21,000 annually, you’d need a pot of £262,500 at 8%, or £350,000 at 6% — a hefty sum, but do-able over time.
Let’s be generous and say you achieve a slightly above-average 10% total return yearly (with dividends reinvested). Investing £500 monthly compounds to around £303,283 after 18 years. At 7% yield, that spits out £21,229 in dividends.
ONS data shows the UK median full-time salary is £39,039 a year, or £2,600 monthly after tax. If you can survive on just £2,100 a month by trimming expenses, you could afford that £500.
Naturally, anything less would just take a few extra years, so the sooner you start, the better. But even investors in their mid-40s should have more than enough time before retirement.
Stock hunting
To aim for that 10% return, don’t just chase sky-high yields — spread risk by building a solid, diversified portfolio.
Here’s one example blending growth and income shares across sectors including engineering, banking, insurance, property, and retail.
| Company | Annualised total returns | Yield (%) |
|---|---|---|
| Rolls-Royce | ~19% | 1.2 |
| NatWest Group | ~14% | 5.7 |
| Legal & General (LSE: LGEN) | ~9% | 8.7 |
| LondonMetric Property | ~6.6% | 6.5 |
| J Sainsbury | ~6.2% | 4.3 |
This mix achieved annualised total returns of 11% since 2016, but the average yield’s a bit low at 5.2%. To remedy this, you could weigh more toward higher yielders like Legal & General once the pot is big enough.
Why Legal & General?
Legal & General’s a FTSE 100 insurance giant with a very long and reliable dividend history. In 2025, it posted a full-year dividend of 21.79p, up 2%, with analysts eyeing a 8.7% prospective yield ahead.
The forward price-to-earnings (P/E) is 10.5, reasonable versus its 10-year average of 9.1, suggesting fair value. Earnings grew 9% in 2025, with 2026 forecasts at the high end of 6-9%.
These are typical characteristics of a sustainable income stock, rather than a growth leader.
But it’s still risky in some ways. Interest rate swings can hurt investment companies, credit spreads can widen on bonds, and longevity trends can strain pensions. Fortunately, its pension risk transfer business helps mitigate these risks.
Final thoughts
A passive income stream in retirement can spell the difference between surviving and thriving. It cuts out the stress about whether a pension will be sufficient and reduces the need to dip into savings.
But the payoff doesn’t come easy. You must stick to the plan, do the research, and make financial sacrifices. The most important step is the first one — start small in an ISA, stay diversified, and let compounding work.
Legal & General’s a good example of the type of starter stock to consider for an income portfolio. But conditions change constantly, so don’t get too comfortable and always keep abreast of new developments as they arise.
