How much do you need in a Stocks and Shares ISA to target an £18,000 annual passive income?

Story by Christopher Ruane

Senior woman potting plant in garden at home© Provided by The Motley Fool

Put money into a Stocks and Shares ISA, buy a range of high-quality dividend shares, monitor the portfolio from time to time.

Can earning sizeable passive income streams really be as simple as that? Yes it can!

Setting the right approach

I ought to explain immediately that this is no overnight scheme. Rather, it is an example of how a long-term approach to investing can hopefully pay rewards in future.

If the £20k is compounded at 8% annually, after 32 years the Stocks and Shares ISA should be worth over £234k. An 8% dividend yield on that would amount to over £18k a year in passive income – without touching the capital.

With more than £20k, the timeline could be reduced — or the goal could be targeted with less than £20k, but taking more years to reach it. Another variable is the compound annual growth rate and later, dividend yield achieved. The higher that is, the quicker the goal could be hit — but it is important to stay realistic. Too much risk could mean what seems like a quicker approach ends up being a slower one after all.

That helps explain why I think the savvy investor will take time to construct a carefully selected, diversified portfolio of high-quality shares.

Another element that could eat into the compound annual growth is fees, charges, commissions, taxes and the like. So choosing the most suitable Stocks and Shares ISA is also wise in my view.

Making a start

I think an 8% target is realistic in today’s market. The current FTSE 100 average dividend yield is 3.3%. Some individual shares offer much higher yields – and the compound annual growth rate takes share price movement into account too.