One day, it would be great to earn a steady passive income from my Stocks and Shares ISA. I’d love to receive, say, a £30,000 income from it at some point. But when and how might I be able to achieve this goal?
First, I’d need a target timeframe. When do I want to reach my target? The longer my money is invested, the greater my investment return should be. That’s because history shows that generally, stock markets rise over time.
That’s why I’ve chosen a timeframe of 25 years. It also means I should have sufficient time to build up a chunky pot from which I can withdraw an income.
Saving for a Stocks and Shares ISA
But how much do I need to save?
I calculate that in 25 years, I’d need a pot of at least £375,000. That might sound like a lot, but remember, I’d be saving and investing over more than two decades.
Stock market returns vary every year, but I think I can realistically achieve an 8% annual gain. It’s fairly close to long-run averages.
If I can do this consistently (and that’s not guaranteed, of course), I reckon I’d need to invest around £430 a month to build my pot.
One thing to notice is that over this period, I’d be investing £129,000. But I’d hopefully end up with almost triple that sum as my investments should grow over time. Sweet.
Income from dividend shares
Once I have a substantial pot, let’s look at how I’d earn my target income.
To generate £30,000 every year from my Stocks and Shares ISA, I’d consider investing in a basket of dividend shares.
The FTSE 100 is home to many high-yielding quality dividend shares. It currently yields around 4%. That’s not too bad. But with some homework and stock selection, I reckon it’s possible to own shares that provide 6%-8% in dividend income.
For example, right now, both Phoenix Group and Imperial Brands distribute 8% in annual dividends to shareholders.
Points to note
Bear in mind that dividends aren’t fixed and they can be reduced or suspended at any time. Some companies have more of a focus on returning cash to shareholders than others. That’s why I’d need to pick carefully.
I’d also select shares from different industries to spread my risk. Diversifying like this will prevent me from putting all my eggs in one basket.
Another point to note is that dividends are typically paid from earnings. But earnings can change. That’s why I value companies with relatively steady profits and business models.
Lastly, I’d want to pick shares that have a solid track record for paying dividends. My two examples above have, on average, been paying dividends for two decades. That highlights an element of reliability.
Overall, I’d consider it an achievable goal. I’d just need the discipline to invest regularly and pick my investments wisely.