Generating a passive income of £692 a week could transform your life. And it might be easier than you think. Want to know how?
A popular way of doing that is to invest in a spread of FTSE 100 companies, inside a Stocks and Shares ISA. UK blue-chips pay among the most generous dividends in the world. Some yield as much as 5%, 6% or 7%, with potential share price growth on top.
That £692 adds up to £36,000 over a full year. Generating the capital to fund that income will take time, but can be done with discipline and patience. Better still, inside an ISA there’s no tax to pay. So it’s worth more than it seems.
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.
Can I really earn that level of income?
Investing is riskier than leaving money in a Cash ISA. But history shows long-term returns are much higher. Over the last decade, the average Stocks and Shares ISA returned 9.5%, against just 4% for the average Cash ISA. My table shows how the difference builds over the years. After a decade or two, it’s massive.
| Term | Cash ISA at 4% a year | Stocks and Shares ISA at 9.5% a year |
| 10 years | £76,566 | £104,480 |
| 20 years | £189,903 | £363,406 |
| 30 years | £357,669 | £1m |
| 40 years | £606,004 | £2.6m |
Cash ISAs work best for short-term savings, rather than long-term wealth-building. Ideally, investors should ideally aim to build a balanced portfolio of at least a dozen stocks from a spread of sectors. One FTSE 100 stock that’s done well lately is oil and gas giant BP (LSE: BP).
The BP share price is up 40% in the last year, and 70% over five years. Long-term investors have got plenty of dividends on top, with the stock typically yielding around 5% in that time. Following the share price surge, the trailing yield has slipped to 4.5%. That’s still a pretty good rate of income.
So how big a pot do I need?
Of course, not every investor would want to buy BP. Fossil fuels are a controversial area. Also, BP has bungled its strategy, making a shift into renewables, then beating an embarrassing retreat. The crisis in Iran has given BP shares a short-term lift. Yet investors are wary, because we don’t know what will happen next in the Gulf. If there’s a peace deal and the oil price retreats, BP could slip. That might also offer a buying opportunity.
Despite these risks, I hold the stock myself. Even with the energy transition, the world needs fossil fuels for decades to come. There will be ups and downs in the share price but with luck, the dividends will keep rolling in. I’ve matched BP with different dividend stocks, including Lloyds, insurer Legal & General, pharmaceutical giant GSK and housebuilder Taylor Wimpey.
So how much do investors need to generate a second income of £692 a week? Let’s say their ISA portfolio returns that annual 9.5% average. In that scenario, they’d need £315,789. Building that kind of wealth takes time, but it can be done. The sooner you get going, the better.
