Here’s how I’m trying to build an ISA that gives me £5,000 passive income each month

All portfolios can generate a passive income. However, unless there’s a fairly substantial amount of money in the pot, it’s not likely to be a life-changing passive income. In fact, the average size of a Stocks and Shares ISA in the UK is £9,000, enough to generate around £450 annually, or just less than £40 a month.

This alone tells us that in order to earn £5,000 a month in passive income, I’ll need a pot of money worth at least 100 times more than the average size of a UK Stocks and Shares ISA. To be precise, assuming a 5% dividend yield, I’d aim for £1.2m invested to earn £60,000 a year, or £5,000 a month.

What’s more, an ISA income’s tax-free. As such, a £60,000 ISA income is the equivalent of a £90,000 taxable salary.

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.

Consistency’s key

I imagine I may have lost some readers’ interest when I noted that an investor would need £1.2m in an ISA to generate the stated passive income. However, the path to £1.2m’s a bit more simple and more achievable that many people would anticipate. The answer lies in consistent contributions to an ISA and a research-driven investment strategy.

And by constantly contributing and registering modest returns year after year, I can benefit from compound returns. Over time, this steady growth can significantly amplify wealth, turning small gains into substantial long-term rewards.

So let’s do the maths. If I were to invest £500 a month over 30 years and achieve 10.3% growth in my investments every year, I’d have £1.2m at the end of the period. Obviously, the stronger the investment and the longer the period, the more I’d have.

The building blocks

Of course, all of this is hypothetical without a real investment. And if I were starting afresh today building towards £1.2m, I’d first look to achieve some diversification. And a great way to do this is through an exchange-traded fund (ETF).

One stock I’ve bought for my daughter’s Self-Invested Personal Pension (SIPP) is Edinburgh Worldwide Investment Trust (LSE:EWI). This Baillie Gifford-operated trust focuses on growth-oriented companies, initially targeting those with market-caps under $5bn, now expanded to $25bn. I find its portfolio fascinating, albeit a risky, with SpaceX as the largest holding at 12.3%, followed by PsiQuantum and Alnylam Pharmaceuticals.

What excites me most is Edinburgh Worldwide’s exposure to cutting-edge sectors like space exploration and quantum computing. However, I’m well aware of the risks involved. Many of these early-stage companies, despite their potential, have limited public financial data. The trust’s performance has been volatile, with a 24% share price return in 2024, but a -33.5% return over three years.

Despite recent challenges, I’m drawn to the ETF’s long-term growth potential. Its focus on innovative companies at the forefront of technological transformation aligns with my investment strategy, and its diversification provides some relief in a sector where many company’s fail. The trust’s current discount to NAV of 4.9% also makes for an attractive entry point.

However, investors should be wary of this ETF’s volatility. Big brother ETF Scottish Mortgage would be a more sensible option to consider for low-risk investors.

The post Here’s how I’m trying to build an ISA that gives me £5,000 passive income each month appeared first on The Motley Fool UK.

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James Fox has positions in Edinburgh Worldwide Investment Trust, and Scottish Mortgage Investment Trust 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.