How much do you need in an ISA for a £500 monthly passive income?
Can you imagine having an extra £500 a month in passive income? That would make a big financial difference for many of us. And the beauty is that, with dividend share investing, you don’t have to lift a finger once your portfolio is set up.
Here’s how large your ISA might need to be for a juicy second income each month.
How much?
The answer to the question of how much you need comes down to the size of the dividend yields on offer. For a £500 monthly (or £6,000 yearly) income, an investor would need an ISA of:
- £120,000 if invested in 5%-yielding shares.
- £100,000 if invested in 6%-yielding shares.
- £85,714 if invested in 7%-yielding shares.
Stock markets have famously rallied over the last couple of years. This has made it harder to find quality, high-yield shares, but there are still plenty out there to choose from.
Purchasing higher-yield dividend stocks can come with greater risk. Large yields can be a product of a tumbling share price, reflecting significant problems facing a company.
But this isn’t always the case. In fact, the London stock market’s packed with strong, diversified companies with leading positions in mature industries.
It’s also worth remembering investors have hundreds of dividend stocks from across the globe to choose from. Why is this important? Holding 15-20 companies, say, in an ISA can help investors effectively balance risk and reward. Even if one of two companies deliver disappointing dividends, the broader portfolio can still deliver a big passive income from year to year.
Fill your dividend trolley
Supermarket Income REIT (LSE:SUPR) is a UK dividend share I’m expecting no drama from in the near term or beyond. It’s raised annual payouts every year since it listed on the London Stock Exchange in 2017.
This reflects the defensive nature of its operations (food retail), as well as its blue-chip client base. Companies like Tesco, Sainsbury’s and Waitrose are unlikely to default on their rent commitments even if times get tough.
This resilience also reflects dividend rules governing real estate investment trusts. These state that 90% of more of their rental earnings must be paid out to shareholders.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
Supermarket Income is sensitive to interest rate movements, and profits can fall when rates are higher. But for me this doesn’t take the shine off its excellent dividend credentials. Speaking of which, the forward dividend yield here is bang on 7%.
How long will it take?
As I say, the UK stock market’s packed with brilliant passive income shares. This is just one I think it worth serious attention right now.
But how long would it take to build an ISA of 7%-yielding stocks like this that generates a £500 passive income? If someone can invest £300 a month and get a 9% average annual return, they could hit their goal after just over 11 years.
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More reading
- How much do I need in an ISA to earn a £100 weekly passive income?
- £1,000 buys 1,162 shares in this red hot FTSE 250 property stock with a 7% dividend yield
- This 7.3%-yielding REIT could turn £20,000 into £122 monthly passive income
- How much do you need to invest in dividend shares to earn £1,500 a year in passive income?
- With dividends of up to 12.6%, these could be the FTSE 250’s best passive income stocks
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended J Sainsbury Plc, London Stock Exchange Group Plc, and Tesco 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.
