Here’s how a £20k ISA could generate £1k of passive income each month!

Using a Stocks and Shares ISA to buy dividend shares is a common way for people to set up passive income streams.

It can also be very lucrative.

For example, a £20,000 ISA could generate a four-figure monthly passive income while sticking to blue-chip FTSE 100 shares. Here’s how.

Setting up for success

Let’s start with the basics.

One’s getting the right ISA. Fees and costs can eat into passive income streams. So it pays for an investor to choose carefully when deciding what Stocks and Shares ISA best suits their needs.

Next is the simple arithmetic question of what sort of investment could generate a monthly passive income of £1,000.

That’s £12,000 a year. From a £20,000 investment that suggests a 60% dividend yield, which I see as totally unrealistic.

By reinvesting dividends each year over the long run, though – something known as compounding – I do think the goal is achievable. For example, imagine an investor manages an average yield of 7%. After 32 years, their ISA ought to be generating over £1,000 of passive income each month.

Sure, 32 years is a while. But this is a long-term investing approach, which I think is understandable given the ambitious nature of the passive income goal.

Finding shares to buy

Still, the theory’s all well and good – but is a 7% dividend yield realistic while sticking to high-quality blue-chip companies? After all, it’s around double the average FTSE 100 yield right now.

I think that it’s achievable in today’s market, but as always it’s important that an investor doesn’t only focus on yield. No dividend is guaranteed to last. So I think the important thing is always to look first for brilliant businesses with attractive share prices and only later to zoom in on what their yield is.

An example of one such share I think investors should consider is M&G (LSE: MNG). The FTSE 100 asset manager recently grew its annual dividend per share, in line with its policy of aiming to maintain or grow the payout every year.

With a 9.9% yield, that has made M&G even more lucrative for shareholders. The market for asset management is huge and likely to stay that way in my view.

M&G’s strong brand combined with a customer base in the millions has proven a valuable formula when it comes to generating sizeable free cash flows that can help fund the dividend.

M&G’s cash generation potential is proven but one risk I see is that investors will pull out more funds than they put in. M&G has been struggling with that challenge over the past couple of years and I see it as a risk to future profits.

But I think there’s a lot to like about the company – and certainly the passive income potential of its chunky dividend yield.

The post Here’s how a £20k ISA could generate £1k of passive income each month! appeared first on The Motley Fool UK.

More reading

• Here’s how much an investor needs in an ISA to generate a £32,000 second income
• A 9.2% yield but down 9% despite a strong 2024, is it time for me to buy more of this passive income superstar?
• 3 FTSE 100 shares with low P/E ratios and brilliant dividend yields!
• Here’s the dividend forecast for M&G shares in 2025 and 2026
• The M&G share price soars 5% as it raises its dividend outlook despite £1.9bn in outflows

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended M&g Plc. 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.

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