See how UK shares could fund a stellar £24k a year passive income in an ISA

Passive income has always appealed to me. Who wouldn’t want to build up a steady cash flow from solid dividend stocks while doing little more than checking their Stocks and Shares ISA from time to time?

Generating income of £2,000 a month, or £24,000 a year, won’t happen overnight. Under the 4% safe withdrawal rate (which states that your portfolio shouldn’t run dry even if you draw income for decades), it would take a hefty £600,000 to hit that income target.

If an investor upped their withdrawals to 7%, they’d earn more income but might have to dip into their pot from time to time. At that level, they’d need around £342,815 to reach their goal. That’s achievable with long-term discipline.

Digging for dividends

One way I try to reduce the size of the required pot is by focusing on high-yielding shares. Among the FTSE 100, one that stands out for income today is commercial property giant Land Securities Group (LSE: LAND), which has a trailing yield of just over 7%.

Landsec owns prime central London offices and big retail destinations across the UK. Lately, it’s had a tough run. The share price has fallen 10% over 12 months and 20% over three years.

The reasons are clear enough. High interest rates have made property less attractive, inflation has pushed up costs, and the work-from-home trend still squeezes office demand. None of these are easily fixed.

Tempting P/E ratio

In May, Landsec posted full-year EPRA earnings of £374m (after property and derivate revaluations, and profits and losses on disposals), just ahead of last year’s £371m. Occupancy reached a five-year high of 97.2%. The dividend rose just 2% to 40.4p a share. It clearly faces challenges, but now could be a tempting time to consider buying.

The stock trades on a modest price-to-earnings ratio of 11.5, which looks like reasonable value to me. If interest rates start falling and the UK economy picks up, that should help. Landsec is also making a push into residential property, which may provide more stable returns in future, although that’s no guaranteed win.

Landsec wouldn’t be my first income pick, but it could still play a role in a wider ISA income portfolio of 15 or more FTSE 100 stocks offering a mix of growth and dividends.

Dividends and growth

Of course, building up a six-figure portfolio won’t happen overnight. But it’s more achievable than it sounds with early and regular saving.

Someone starting at age 30 and investing £200 a month in a Stocks and Shares ISA could hit £354,992 by 65. That assumes 7% average annual returns, roughly in line with the FTSE 100 average. If they increased their contributions every year, in line with inflation, they should end up with a lot more, although that’s not guaranteed.

Pick the right stocks, reinvest the income and keep at it for decades. That’s my strategy. A reliable second income could be the reward — or even better, full financial independence. Either way, it all starts with a plan and a long-term approach. It’s hard to beat passive income.

The post See how UK shares could fund a stellar £24k a year passive income in an ISA appeared first on The Motley Fool UK.

More reading

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Land Securities Group 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.