How much do you need in an ISA to target a £513.75 monthly passive income?
Whenever I think of ISAs, ABBAâs hit Money, Money, Money comes to mind. The opening lyrics are: âI work all night, I work all day to pay the bills I have to pay. Ain’t it sad?â
Yes, it is.
Thatâs why, many years ago, I decided to set aside some of my disposable income and started investing in the stock market. I opened an ISA to supplement my salary with dividends.
According to MoneySuperMarket, the average person has £513.75 a month left over after paying essential bills. But how much would be needed in an ISA to earn the same amount from dividends? Letâs see.
A bit of number crunching
The answer to this question depends on the level of return achieved.
For example, the FTSE 100âs currently (9 January) offering a yield of 3.2%. The average for the 10 biggest (by market cap) companies on the index is 3.5%. Better still, an equal investment in each of the five highest-yielding Footsie stocks would return 7.1%. These figures are based on dividends paid over the past 12 months, although there can be no guarantee that history will be repeated when it comes to shareholder returns.
Under these three scenarios, an ISA would need to be worth £192,656, £176,143, and £86,831 respectively, to generate a disposable income equal to the UK average.
Admittedly, these are large sums. Although, I reckon itâs possible to get close to them by saving as much as possible over an extended period.
According to AJ Bell, from January 1984 to December 2024, the FTSE 100 achieved an annual return of 5.2%. An individual investing £250 a month for 25 years at this rate, would build an ISA worth £154,065.
An alternative approach
However, if dividends had been reinvested â a process known as compounding â it would have been possible to do better. From January 1986 to December 2024, the average annual total return of the index was 8.6%. At this level, a monthly investment of £250 would grow to £264,180 after two and a half decades.
Thatâs why, as tempting as it might be to bank the dividends and pay those bills that ABBA sang about in the 1970s, itâs better — if individual circumstances allow — to reinvest them.
One possible option
For someone looking to follow a similar strategy, with its current yield of 7.4%, I reckon Phoenix Group Holdings (LSE:PHNX) is a dividend share to consider. It looks as though itâs going to raise its payout in 2025. If it does, it will mark a decade of increases.
Over the long term, the savings and retirement groupâs likely to benefit from an ageing population and an expected increase in the state retirement age. However, it does have to contend with competition from some lower-cost challengers. Also, with nearly £290m of financial assets on its balance sheet, the group remains vulnerable to global market volatility.
However, its results for the six months ended 30 June 2025, were encouraging. Compared to a year earlier, they showed a 20% increased in adjusted operating profit, a 9% rise in operation cash generation, and a 3% improvement in its Solvency II ratio.
Thatâs why I think Phoenix Group is an excellent passive income stock to consider including in a well-diversified portfolio of shares.
The post How much do you need in an ISA to target a £513.75 monthly passive income? appeared first on The Motley Fool UK.
Should you invest £1,000 in Phoenix Group Holdings plc right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Phoenix Group Holdings plc made the list?
More reading
- £500 buys 67 shares in this 7.4%-yielding income stock!
- How to target a Stocks and Shares ISA portfolio returning £2k a month in dividends
- How Iâm targeting £12,959 a year in dividend income from £20,000 in this FTSE 100 dividend gem
- How Iâm aiming to build a £12,000 second income in 10 years from UK dividend shares
- Got a spare £20k for a Stocks and Shares ISA? Hereâs how it could generate a £1,400 passive income in 2026!
James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended Aj Bell 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.
