An ISA can be a good way to generate passive income. Thanks to dividends paid by the companies in my Stocks and Shares ISA, I can earn passive income.
I have scoured the market to try and find what seems like the best Stocks and Shares ISA for me. After all, I do not want to earn passive income in the form of dividends only to end up using a lot of it to pay fees on my ISA!
Setting a target
How much passive income I can earn from my ISA depends on two things: how much I invest and the average dividend yield I earn.
The average dividend yield is not fixed. After all, a company can cut or increase its dividend. So, even if I buy a share today that yields 9.2% — such as Legal & General (LSE: LGEN) — that does not mean that it will keep yielding 9.2%.
Indeed, Legal & General aims to grow its dividend per share by 2% annually in coming years. But it has also cut its dividend before, as happened after the 2008 financial crisis.
At 9.2%, Legal & General’s dividend yield is far above the FTSE 100 average of 3.6%. But I reckon that by investing in a mixed portfolio of blue-chip shares like Legal & General, I could realistically target a 7% average dividend yield right now without moving outside the FTSE 100 when hunting for shares to buy.
At that level, earning £500 per month (£6,000 annually) would require almost £86,000 invested in my Stocks and Shares ISA. Not only is that a lot, it is well above my annual ISA contribution allowance.
Investing for the long term
So, I take a multi-year viewpoint on setting up passive income streams. As well as contributing to my ISA regularly over time, I also try to increase its value by compounding dividends.
Even with a £20k lump sum, if I compound that at 7% annually, after 21 years I ought to have the amount I need in my ISA for a 7% yield to equate to over £500 per month in dividends.
If I keep adding to my ISA over time, I could speed that process up. That is what I am doing.
Finding shares to buy
What attracts me to a share like Legal & General for such a plan?
After all, its profits over the past couple of years have been smaller than in the years before that – and the share price is down by a quarter in the past five years.
The weaker profits do concern me and one risk I see is a weak economy hurting investment returns, potentially leading some policy-holders to switch providers. That could hurt profits.
But Legal & General has a lot of what I look for when hunting for shares to buy for my ISA.
It operates in an area I expect to benefit from strong long-term customer demand. The firm has competitive advantages, from its well-known brand to an entrenched customer base. I feel I understand the business and so can assess it.
Plus, crucially, it has proven its ability to generate excess cash – and willingness to use some of that cash to fund dividends.
The post How much in a Stocks and Shares ISA could earn me £500 of passive income each month? appeared first on The Motley Fool UK.
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How much would I need in an ISA to earn a £2,000 monthly passive income?
C Ruane has positions in Legal & General Group Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
