Every month I invest in my Stocks and Shares ISA to help build wealth. The ultimate goal is to generate passive income from my portfolio.
Here, I’m looking at how large it needs to be to start throwing off my target figure of £50k in tax-free dividends each year. And how long it could take to reach starting from scratch.
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Maths
Stripping things back, I think there are two key ingredients. How much money I invest every month and what my ultimate rate of return is over the long run. The first I hope will be broadly consistent, while the other is harder to know in advance.
For example, the ISA contribution limit is £20k a year and the annual average return from the stock market is around 10% with dividends reinvested. Using those figures, it’s going to take me roughly 17 years to build an £833,000 portfolio. This will be large enough to generate £50,000 a year in passive income, with a 6% dividend yield.
But life can throw curveballs and nearly everything is getting more expensive in the UK. So the reality is that some years I might not be able to max out the ISA limit. However, investing £15,000 a year — or £1,250 a month — would only extend the timeline by just over two years. So thankfully, it won’t change things too much.
Getting there
Now, there are variables here because dividends aren’t guaranteed and I won’t generate 10% every year. These are just averages. But to offset the risk of dividend cuts and underperforming shares, I am keeping my portfolio diversified.
Specifically, I’ve decided to invest in a mixture of growth stocks, dividend shares, and a smattering of investment trusts. I hope these can drive the returns I need to get me to my long-term target.
Some stocks I class as hybrids, delivering both share price and dividend growth. My favourite is probably new FTSE 100 entrant Games Workshop (LSE: GAW). Shares of the Warhammer owner have returned well over 100% in the past five years, including rising dividends. Its policy is to distribute nearly all net income to shareholders.
In the first half of its 2024/25 period, the company’s sales at constant currency jumped 16.4% year on year to £274.2m. Core operating profit increased 17.6% to £98.1m, while income from licensing more than doubled to £28m.
The company warned that higher costs stemming from the Budget may lead to increased input costs from suppliers this year and next. So this is worth monitoring, as is a return of inflation, which could pressurise its customers.
However, I intend to hold my shares longer than 2026. Warhammer has barely scratched the surface of its long-term opportunity in Asia, where tens of millions are deeply invested in gaming, animé, fantasy, and sci-fi genres.
The deal signed with Amazon to adapt its Warhammer 40,000 universe into films and television series should also give the brand a boost. I expect this stock to continue doing well for my portfolio over the long run.
