How does using a Stocks and Shares ISA to make a passive income sound to you? I use one of these tax-free products alongside a couple of SIPPs to target extra cash. If things go to plan, I’ll be making a four-figure income every month to fund my lifestyle in retirement.
Want to know how?
Compound gains
Every year, individuals who use ISAs to invest in shares have £20,000 contribution room to use. Drip-feeding money into the stock market is a proven way to build long-term wealth. In recent decades, equity investing has delivered an average annual return of 8%-10%.
However, investing a lump sum into a Stocks and Shares ISA can be a better way to target high returns. Why? It maximises the time your money is exposed to the market, thus boosting the compounding effect over time.
Don’t just take my word for it, though. According to Hargreaves Lansdown, “almost a third (30%) of [our] ISA millionaires topped up or opened an ISA in the first two weeks of the 2025/26 tax year“. The most successful investors get their cash working harder for them and sooner.
What to buy?
Let me show you how lump sum investing could deliver a £1k a month ISA income. In this example, we’ll assume an investor has a spare £20,000 to use for buying dividend shares. Any dividends received would also be reinvested, boosting compound gains even more.
If our investor targeted an average 6% yield from their diversified portfolio, they’d need a Stocks and Shares ISA of £200,000 for a £1,000 monthly second income. At this level of dividend yield, there are plenty of shares they could target.
Myself, I hold a variety of income-paying stocks in my portfolio, including:
- Legal & General – 8.7% yield
- Greggs – 4.5% yield
- Primary Health Properties – 7.5% yield
- Barratt Redrow – 5.8% yield
With shares like these, I think an average annual return of 9% is possible, factoring in capital gains and dividends. At this rate, I could turn a £20,000 ISA into a £200,000 one in just over 25 years, without any extra cash being invested.
A top ISA pick?
This strategy isn’t risk free, as dividends are never guaranteed. But holding a range of quality, cash-generative companies can substantially boost the chances of a reliable passive income.
Take Greggs, which has a strong record of dividend growth this century. Its only dividend cuts came in 2020-2021 when the once-in-a-century global pandemic shuttered its bakeries.
Profits (and dividends) here are linked closely to broader economic conditions. But Greggs’ focus on the food market leaves it better placed than most other retail shares during downturns. What’s more, the baker’s strategy of producing value products — combined with its strong brand power — helps it outperform its peers in tough times.
The FTSE 250 firm is also highly cash generative, providing the financial foundations for its progressive dividend policy. And with capex from its store buildout policy having peaked last year, Greggs is tipped by analysts to start paying special dividends again, possibly as soon as next year.
