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For most London-based workers, £3,580 per month in passive income would mean they could quit their job and retire early. And that’s no arbitrary figure – it’s based on estimates that the average London salary is around £43,000 a year.
But how much would an investor need to pile into their Stocks and Shares ISA to earn £43k a year? Well, if they wanted to do it in one lump sum, they’d need about £682,539. That’s based on an annual return of 6.3% — the FTSE 100 average for the past 20 years (dividends included).
That’s no small amount of cash. And since the annual tax-free allowance on an ISA is only £20,000, it would be better to build up to it slowly.
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.
A wealthy investor with a £20k lump sum and £500 to contribute each month could reach that level in around 30 years (using the 6.3% average). That’s acceptable – but I think a smart investor could beat the FTSE 100 average and get there faster.
Investing in companies that pay higher-than-average dividends is one way to earn higher-than-average returns. The trick is picking companies that are reliable and — critically — have a sustainable dividend policy.
Let’s look at one example.
A reliable, high-yield dividend share
National Grid (LSE: NG.) is a relatively boring utility stock that quietly delivers above-average returns most years. It suffered heavy losses during the 2022 recession but on balance, typically does very well.
Since it operates regulated electricity and gas networks in the UK and US, it has relatively predictable, inflation‑linked revenues — rather than cyclical retail-style earnings. This extra stability has helped it achieve a long history of dividend payouts, and it’s commonly found as a core holding in UK income portfolios and ISAs.
However, its debt is a growing concern due to massive investment into infrastructure upgrades. This makes the business sensitive to higher‑for‑longer interest rates or tighter credit conditions, which could increase refinancing costs and squeeze the cash available for dividends.
Energy prices in the UK are already high, so it may need to find additional funding if rates don’t decrease as expected. This is unlikely to be a huge issue in the short term but it’s worth keeping an eye on.
The bottom line
When aiming for passive income, it’s smart to look for stocks that tend to grow slowly, return steady cash, and are held for years rather than traded frequently. Income investors often focus on mature, cash‑generative sectors such as utilities, consumer staples, telecoms, infrastructure, and real‑estate investment trusts (REITs).
Over the past decade, National Grid delivered a total return of 148% — equating to an average of 9.5% per year. That’s well above the FTSE 100 average, so it’s clear to see why it may be worth considering for a long‑term passive income strategy. But as with any company, it faces risks, so never go all in on one stock alone.
With a diversified portfolio of reliable shares yielding between 5% and 8%, an ISA investor could realistically outpace the FTSE 100 and potentially retire earlier than expected.
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.
