Stock market

How much passive income can I get if I invest £200 a month in a stocks and shares ISA?

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To get decent passive income from UK dividend stocks, wouldn’t we need to invest a lot?

With a 5% yield, we would need £10,000 to accumulate just £500 per year. So, yes, we need to build as much as we can. But it may not be as difficult as we think.

If we regularly invest small amounts of money, return our dividend cash, and continue for the long term, we may be surprised at how much we can achieve.

UK profits

Using a stocks and shares ISA, we can make smaller payments each month. And it allows us to generate a reasonable investment amount. And then don’t worry about taxes on the years of profits we want to get.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content in this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any tax advice. Readers are responsible for conducting their own due diligence and seeking professional advice before making any investment decisions.

How big is the pot?

What can we expect from our modest £200 a month? I’m going to look at two stock candidates.

Phoenix Group Holdings (LSE: PHNX) is one of them. I picked it partly because it has the biggest yield. FTSE 100 Now, at 10.6 percent. And also because I rate it as a quality company with long-term potential.

There is no such thing as a risk-free dividend, especially not one as large as this one. The insurance sector has the most volatility, and I think it can be volatile. We can see from the chart above how badly the share price has performed.

For my money, a £200 monthly investment in the Phoenix Group could grow to £155,000 over 20 years. And can then pay £16,000 a year in passive income.

Now, I think the chances of the dividend and share price staying the same for the next two decades are pretty much nil. But we may see share prices rise. And combined with good returns, a strong chance of good results.

Permanent Payer

Next is up. National Grid (LSE: NG.), is seen as a reliable cash cow when it comes to long-term returns.

We’ve just heard that the dividend yield will be lower as a result of the new stock issue, but we should still be looking at a yield of around 5.2%. Historically, it has been more stable than stocks in more volatile sectors.

Investing the same £200 per month in National Grid, again with dividend cash, could grow to £83,000 over 20 years.

And from that, the same dividend yield could pay £4,300 a year in passive income.

I think the biggest risk here is that the share price could suffer if the firm surprises the market in any way. And we, in fact, saw exactly that following the news of the unexpected equity issue.

The Company is also in a regulated industry, which may limit its earnings.

Diversified production

But I think both of these can make a good contribution to a balanced ISA of 10 to 15 stocks. And to repeat the average Stocks and Shares ISA return of 9.6% over the last decade… well, I’d say that’s worth aiming for.

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