How much do I need in an ISA to earn £500 a month in passive income?
Passive income can feel like a distant dream for some, but the path to £500 a month from a Stocks and Shares ISA has a surprisingly straightforward starting point: the dividend yield.
That £500-a-month income target equals £6,000 a year, tax-free inside the ISA wrapper. But what size portfolio would it take to get there without relying on heroics?
How big a pot is needed for £500 a month?
The maths is simple, even if the investing journey isnât. A portfolio with a yield of 4% would need roughly £150,000 to generate £6,000 a year. At 5%, the pot drops to around £120,000. At a more conservative 3%, it rises to about £200,000.
The tricky bit is that higher yields are rarely ‘free money’. When share prices are strong, yields are often lower as profits are reinvested in the companyâs growth.
When yields look generous, the market can be signalling uncertainty about profits, cash generation, or the durability of the dividend. Thatâs why a dependable payout can matter more than a headline percentage.
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Whatâs happening with NatWest shares?
Iâm watching NatWest Group (LSE: NWG) after its recent annual results release for the year ending 31 December 2025.
The numbers included a proposed final dividend of 23p per share, meaning a total of 32.5p for the year. That’s a 51% increase on 2024’s distribution. That came after the bank beat consensus estimates and posted a 24% jump in operating profit to £7.71bn.
In the days after those results, the share price has been choppy. As I write on 26 February, the stock is trading at £6.16 and is still shy of its 52-week high of £7.05.
Banks are typically judged on earnings and book value. On that basis, NatWest looks modestly priced: a trailing price-to-earnings (P/E) ratio of 9.1 and a 5.3% dividend yield. NatWestâs price-to-book (P/B) ratio is sitting at 1.1, which is lower than key banking peers including HSBC and Lloyds.
I think those metrics are worth a closer look for investors seeking to build a passive income. That’s despite some key risks including high regulatory scrutiny and sensitivity to interest rate changes and the health of the economy.
Building a financial future
I find it helps to remember that most passive incomes are built gradually. Regular contributions, reinvesting dividends, and avoiding the temptation to chase the biggest yields can do a lot of the heavy lifting.
Of course, returns arenât guaranteed and dividends can be cut, especially in tougher economic periods. But with a diversified mix of reliable dividend payers and steady investment, investors can improve the odds of building an income stream thatâs resilient enough to last.
In the end, a £500 per month passive income is less about finding a silver bullet and more about sticking with a repeatable plan. From there, let the magic of compounding do its thing.
The post How much do I need in an ISA to earn £500 a month in passive income? appeared first on The Motley Fool UK.
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More reading
- A once-in-a-decade chance to buy 3 cheap stocks with fabulous yields?
- This one event could send NatWest shares into free fall
- Here’s how much £5,000 invested in NatWest shares 2 years ago is now worth
- My big long-term growth holding may also be turning into a 6%+ yielding passive income powerhouse!
- Up 200% with a P/E of 8.5 and 5.3% yield â are NatWest shares still a screaming buy?
Ken Hall 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.
