Generating passive income from a portfolio of FTSE 100 companies is a brilliant retirement strategy, in my view. Even better if they’re bought inside a Stocks and Shares ISA as all capital gains and dividend income are sheltered from tax. But where to begin?
One starting point is to set an income target. Let’s say somebody is targeting a second income of £1,500 a month in retirement, to top up their State Pension and other pensions. That works out as £18,000 a year. Based on the 4% ‘safe’ withdrawal rule, that would require a pot of £450,000. The principle here is that by limiting annual withdrawals to 4%, the income should be sustainable without having to dip into the capital.
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Now £450,000 sounds daunting, but it’s the type of money people need to secure a comfortable retirement, and investing in equities could perhaps be the best way to generate it. Steady investing and reinvesting dividends can work wonders. Contributing £375 a month to a diversified portfolio returning an average 7% a year could grow to £454,828 over 30 years.
NatWest shares have flown
Rather than simply tracking the market, I prefer to build a balanced spread of 15 to 20 top shares. That way I can target stocks that suit me, particularly regular dividend payers. The banking sector has been a terrific source of growth and income in recent years. Higher interest rates have boosted margins and profits, lifting both share prices and dividends.
FTSE 100 NatWest Group (LSE: NWG) has been swept along by the banking revival. Its shares jumped 35% over the last year, and 185% over two. Dividends are on top. Last week, they fell 12%, as investors feared it had overpaid when buying wealth manager Evelyn Partners for £2.7bn. Acquisitions are always risky, but there is a rationale for this one, as it gives NatWest a new growth opportunity beyond traditional high street banking.
Friday’s (13 February) full-year results showed operating profit before tax climbing 24.4% to £7.7bn, up from £6.2bn the year before. Return on tangible equity improved from 17.5% to 19.2%. The total dividend for 2025 hit 32.5p per share, up a bumper 51% on 2024. Net interest margins rose from 2.13% to 2.34%.
These are good figures but investors were sceptical. I think there’s a view that the banking rally has run for so far, and has to slow. Banks have been getting more expensive, with price-to-earnings (P/E) ratios climbing. However, with 2025’s higher earnings factored in, NatWest’s P/E has fallen to just 8.75, which isn’t exactly expensive.
Long-term focus
For long-term savers, that pullback may present an opportunity. Especially income seekers. While NatWest’s trailing yield has fallen to 3.75%, it’s forecast to hit 6.1% across full-year 2026. I think NatWest is well worth considering after the recent dip, but short-term growth may be bumpier as it battles to find new growth opportunities.
Building that £450,000 pot takes time and persistence. But with a fair wind, the wealth should compound and grow steadily over the years. All free of tax in an ISA. That’s the magic of stocks and shares.
