How much do you need in an ISA to aim for a life-changing passive income of £30,000 a year?
Generating a passive income from a portfolio of UK stocks beats working for a living. Dividend-paying shares deliver a second income stream without all the effort of getting to work.
Better still, that income should rise over time, because most dividend-paying FTSE 100 and FTSE 250 companies aim to increase payouts year after year. Thatâs not guaranteed of course, nothing is with equities. So investors should diversify across at least a dozen stocks to spread their risk.
Many would-be investors are scared off by stock market volatility but, over the long run, this is the price paid for the superior historical returns of stocks and shares. With interest rates likely to fall further in 2026, savers who stick to cash will see returns diminish, while dividend yields could keep rising.
Investing in FTSE 100 shares
Generating £30,000 a year from a Stocks and Shares ISA would transform someoneâs retirement. If their stock picks generated an average yield of 5%, they’d need a £600,000 portfolio. Playing it safe and withdrawing just 4% a year requires £750,000. They’re huge sums, obviously, but can be built steadily through regular investing over the years. Just don’t leave it too late to get started.
A 30-year-old who already has £25,000 tucked away in pensions or an ISA, then invested £300 a month could end up with a staggering £799,500 by age 65. Older investors may have to put more away to play catch up.
My figures assume dividends are reinvested and the portfolio achieves an average total return of 7% a year. Could be more, could be less. Shares donât guarantee results, but history shows they beat almost every other type of investment over time.
Imperial Brands is a dividend star
Many FTSE 100 stocks have a long and honourable record of paying regular dividends and generating loads of share price growth. Imperial Brands (LSE: IMB) currently yields almost exactly 5%. It’s raised dividends every year this millennium, except 2020, when many companies cut shares while waiting to see how the Covid pandemic panned out.
The shares have powered on, rising 25% in the last year and more than 100% over five years. Smoking is in decline in the West, and the sector faces constant regulatory pressure. Yet big tobacco has used brand strength and pricing power to take a bigger share of the shrinking market, and exploring new opportunities such as vapes. Imperial owns Gauloises, Davidoff and Winston, as well as e-cigarette blu and nicotine pouch Zone.
On 18 November, it posted a 4.1% increase in net revenues from tobacco and next-generation products to £8.3bn, for the year to 30 September. Cigarette volumes fell 1.7%, but revenues still climbed 3.7% due to higher prices. With a price-to-earnings ratio of 10.1, these shares still look good value worth considering as part of a balanced portfolio. It may be worth checking out rival British American Tobacco too.
High-yield opportunities
Big tobacco isnât for everyone, but it isn’t the only way to earn a passive income. Other FTSE 100 dividend stocks offer yields of 6%, 7% or even 8.5% in one case, without investors lifting a finger after pressing the Buy button. Steady contributions, reinvested dividends, and patience can turn even modest portfolios into life-changing sums over decades.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. and Imperial Brands 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.
