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Many investors dream of generating a reliable passive income, and a Stocks and Shares ISA can be a powerful tool to achieve that goal. But how much would an investor actually need in their ISA to generate a decent amount, say £2,000 a month?
To generate a sustainable income, building a well-diversified portfolio is essential. Investing in a mix of dividend-paying stocks can help balance risk and reward. Some shares offer high yields but come with volatility, while others provide steadier growth but lower immediate income.
Building a spread of FTSE 100 shares
An ideal portfolio would contain 15-20 quality FTSE 100 stocks across different industries, giving it stability and reducing exposure to any single company or sector. Stocks in sectors such as banking, consumer goods, utilities and commodities can be particular handy.
One company worth considering for an income-focused portfolio is Rio Tinto (LSE: RIO). As one of the world’s largest mining groups, it produces essential commodities such as iron ore, aluminium and copper.
Like many commodity stocks, Rio Tinto has hit by the slowdown in China, and the global economy generally. All this talk of trade tariffs isn’t helping.
Rio’s full-year 2024 results, published on 20 February, showed underlying EBITDA slipping 2% to $23.3bn, mostly due to falling iron ore prices. Analyst expected better. The share price has now fallen 3.5% over the last year. However, it’s actually up 37% over five years. With all dividends on top of that.
The Rio Tinto share price looks good value today, with a price-to-earnings (P/E) ratio of just 9.3. Mining stocks are inherently cyclical due to fluctuating commodity prices, so I reckon it’s better to buy them when they’re down rather than up.
Taking a long-term view is essential. Investors should aim to hold for a minimum five years, but ideally much longer than that.
Dividends are great but aren’t guaranteed
Now let’s say someone puts together a portfolio with an average yield of 6% a year. To hit a target income of £2,000 a month, or £24,000 a year, an investor would need around £400,000. That’s not the kind of sum investors can build overnight.
An investor who set aside £333 a month (£4,000 a year) for 30 years could get there, assuming an average total return of 7% a year. If their shares perform better, or they invest more, they’d get there faster.
With an annual ISA annual limit of £20,000, it’s possible to reach this goal using only a fraction of the tax-free allowance.
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. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
While building a six-figure ISA portfolio takes time and discipline, the rewards are significant. A well-structured investment plan, focusing on reinvesting dividends and allowing compounding to do its work, can transform relatively modest monthly contributions into substantial wealth over time.
Patience, consistency and a long-term mindset are key to making it happen. Picking shares is the fun part. Given current volatility, there are plenty of bargains on the FTSE 100 right now. Just give them time to recover, and for those dividends to roll up.
