How much would you need in an ISA to earn a £1,000 monthly passive income?
Passive income ideas come in all shapes and sizes. One simple one is to stuff an ISA with blue-chip shares and use dividends to build passive income streams.
That can be lucrative â and genuinely passive. But how much can it earn? That depends on a few different factors. Letâs get into some of them.
Quality and value
A company does not have to pay dividends. Whether it does depends on several factors.
Does it have enough spare money? Do directors want to use that (or some of it) to fund a dividend instead of spending it on something else, like growing the business? That means a dividend is never guaranteed.
The smart investor will choose shares for their ISA in what they see as high-quality companies. But they will also pay attention to value at a given share price. After all, a juicy dividend on one hand may still be unattractive if, on the other hand, a share price keeps going down, meaning it shows a capital loss for the investor.
Even the best-run company can find itself facing unexpected difficulties. That is why it is important to keep a Stocks and Shares ISA diversified across different businesses.
Dividend yield’s an important factor in determining income
That also explains why, just because a share has a large annual payout relative to its cost (what is known as its dividend yield), that on its own does not necessarily make it attractive.
Instead, the key question is how sustainable such a yield may be? The average yield of the ISA and the amount invested help determine the likely annual passive income. At a 5% yield, the target of £12k a year (£1k each month, on average) would require a £240k ISA.
Five percent is above the FTSE 100 yield of 3%. But I think a higher target is still realistic, say 6%. That would require a £200k ISA. Given the ISA contribution allowance, an investor could build to that amount over a number of years.
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Finding shares to buy
As an example of an income share I think investors should consider for their ISA, I would point to FTSE 100 insurer Aviva (LSE: AV). It yields 5.3%.
Lately, Aviva has been growing its dividend per share handily each year. That follows a sharp cut in 2020.
Insurance is a market with high, resilient demand and I think that is likely to remain the case. As the countryâs leading insurer, Aviva benefits from a large customer base, proven business model, and economies of scale.
Its increased focus on the UK in recent years (after selling off some foreign operations) has helped sharpen the firmâs strategic concentration. But that brings the risk of any specific UK market shifts.
So if a rival decides to compete strongly on premium pricing, for example, that could hurt Avivaâs revenues, given its market leadership.
Choosing the right ISA platform
Another factor that contributes to how much passive income the ISA actually generates is how much it charges in fees and commissions.
So it makes sense to take some time and compare options from different Stocks and Shares ISA providers. Even small charges can add up over time.
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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.
