£20k in a Stocks and Shares ISA? Here’s how an investor could target £1,342 in passive income each month

A Stocks and Shares ISA can be a platform for long-term investment. Not only might that mean capital growth, it can also mean sizeable income streams.

Such an approach requires patience among other things. But long-term investment is all about patience, so that is no surprise.

This approach can be highly lucrative.

As an example, here is how an investor could put a £20,000 Stocks and Shares ISA to work in an effort to build monthly passive income streams of well over £1,000.

Understanding how shares build income

Even £1,000 a month would be £12,000 a year. To earn that now from a £20,000 ISA would take a dividend yield of 60%, which I see as improbably high. Few FTSE 100 shares even offer a double-digit yield and most are far lower (the average is 3.4%).

But over time, reinvesting dividends (known as compounding) can help build bigger income streams.

For example, if the ISA compounds annually at 8%, after three decades, it should be worth over £201,000. At an 8% yield, that should generate monthly dividends of roughly £1,342 on average.

Building the right sort of portfolio

An 8% compound annual growth rate might not sound too challenging.

But remember, over the course of 30 years, the stock market is likely to have down years as well as up years.

Still, in today’s market I think it is achievable. For example, one FTSE 100 share with a standout yield (9.4%) is insurer Phoenix Group (LSE: PHNX). It announced today (17 March) in its annual results that it will increase its annual dividend by 3%.

The company has a policy of aiming to grow its dividend per share annually. Last year, operating cash generation grew by over a fifth, meaning that not only is the dividend covered, but Phoenix expects to produce around £300m of excess cash annually.

Not all years will necessarily be as strong as that, admittedly. Phoenix faces risks. Last year, for example, it noted “higher outflows due to consumer behaviour in response to the UK budget uncertainty in the year“. If economic uncertainty continues, I see a risk that policy holders could keep pulling out funds, hurting profits.

But with a proven business model and cash generation capability, I see Phoenix as a company income-seeking investors should consider for their Stocks and Shares ISAs.

Sticking to proven principles

Any share can disappoint, of course. That is why diversification is an important risk management strategy. £20K is ample to allow for it.

The 8% compound annual growth rate could come from a mixture of dividends and capital gain. But dividends are never guaranteed and share prices can move down as well as up, so I think a smart investor will stick to high-quality businesses they understand.

First of all, of course, is choosing a Stocks and Shares ISA. With plenty of options available, it pays to take some time to decide what one looks best.

The post £20k in a Stocks and Shares ISA? Here’s how an investor could target £1,342 in passive income each month appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. 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.