Many people own a Stocks and Shares ISA to try and provide for a more comfortable retirement. They spend their working lives targeting a nest egg large enough to produce a healthy dividend income stream for their golden years.
With this in mind, how much would be needed in an ISA to generate a passive income equal to the full State Pension? For those with a full record of contributions, this is currently (2026-2027) £12,548 a year. Let’s crunch some numbers to try and find out.
How do the figures look?
Logically, the larger the ISA the bigger the income. Right? Not necessarily.
For those following the 4% rule, in which an individual draws down their pension pot over time, it clearly pays to have as large a portfolio as possible.
However, others prefer to move their ISA into dividend shares to provide an income stream. Here, the choice of stocks can have a big impact. For example, an ISA paying 3% would need to be worth £418,267 to meet our income target of £12,548.
Other examples are as follows:
- 4% – £313,700
- 5% – £259,960
- 6% – £209,133
- 7% – £179,257
- 8% – £156,850
I think it’s amazing how a relatively small change in the rate of return can have such a large impact.
Fortunately, there are plenty of high-yielding dividend shares to choose from. In fact, there are 180 on the FTSE All-Share index that are currently paying at least 4%.
| Yield (%) | Number of stocks |
|---|---|
| 10.00+ | 18 |
| 9.00-9.99 | 12 |
| 8.00-8.99 | 19 |
| 7.00-7.99 | 20 |
| 6.00-6.99 | 22 |
| 5.00-5.99 | 41 |
| 4.00-4.99 | 48 |
| Total | 180 |
However, some of these yields need to be treated with caution. As experienced investors know, payouts can fluctuate significantly from one period to another.
The most reliable dividend payers can often be found in industries that have defensive properties, ones that are less affected by a wider economic slowdown.
Such as?
One example is J Sainsbury (LSE:SBRY). After all, people will always need to eat. If incomes are squeezed, shoppers might switch away from more expensive brands. But supermarkets don’t mind this as the margins on their own-label items are often higher.
Based on amounts declared over the past 12 months, the UK’s second-largest grocer is yielding 4.4%. On this basis, £285,182 of its shares would match the full State Pension of £12,548 a year.
Sainsbury’s has, so far at least, managed to see off the threat of the German discounters. Its market share of the Great Britain grocery market is at a post-pandemic high (all figures are for the 12 weeks ending):
- 17.5.26 – 15.2%
- 18.5.25 – 15.1%
- 19.5.24 – 15.1%
- 21.5.23 – 14.8%
- 22.5.22 – 14.7%
Over the same period, the combined share of Aldi and Lidl has increased from 16.1% to 19.4%.
To some, a five-year 0.5 percentage point increase in market share doesn’t seem like much to shout about. But in the ultra-competitive grocery market, I think it’s a small triumph.
Of course, this could quickly change. Customer loyalty isn’t what it was. There’s more choice and the internet means it’s easier to shop around. Also, industry margins are very thin.
But history shows Sainsbury’s has an excellent track record for dividends. The calculator on its website reveals that someone who invested in the stock 25 years ago would have received dividends equal to 78% of their original investment.
I’m not expecting stellar share price growth. But I think its dividend makes it a stock to consider.
Should you invest £5,000 in J Sainsbury Plc right now?
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James Beard owns shares in J Sainsbury plc.
