A Stocks and Shares ISA can be a useful platform for someone who wants to build up passive income streams by investing in a diversified mixture of dividend shares.
I will explain why below, showing how an empty ISA today could potentially earn £19,343 a year a decade hence.
Slow and steady wins the race
In this example, the investor utilises their full standard ISA contribution allowance of £20k per year.
The approach would still work with less, by the way – even much less – but the passive income earned would be correspondingly lower.
Let us assume that the ISA grows at a compound annual rate of 7%.
What is compound annual growth, I hear you ask?
It is made up of share price gains and dividends. But that growth can be damaged by share price losses.
Also fees and commissions can reduce it, so it makes sense to choose carefully when considering what Stocks and Shares ISA to use for this passive income plan.
Compounding the decade’s worth of gain on £20k annual contributions, the ISA ought to be worth over £276k.
Using an ISA to earn passive income
Having an ISA worth over a quarter of a million pounds a decade from today sounds good.
But how exactly might that generate passive income?
At that point, the compounding inside the ISA stops and dividends are taken out as passive income.
Assuming a 7% dividend yield, that ought to generate roughly £19,343 of passive income each year.
One share to consider today
What the stock market and yields might look like a decade from now nobody knows for sure.
But we do know how it looks today.
One share I think merits investors’ consideration in the current market for its long-term growth and income potential is asset manager M&G (LSE: MNG).
It currently yields 6.2%. The share price has increased 37% over the past five years.
Neither is necessarily an indicator of what may happen in future. While M&G aims to keep growing its dividend per share annually as it has been doing, shareholder payouts are never guaranteed at any company.
So, why do I like it?
For starters, the asset management industry is huge and set to stay that way over the long term. Thanks to the large sums involved, even modest fees can soon add up.
M&G has some strengths that can help it compete successfully in that space, such as its well-known brand and a customer base that runs into millions, across multiple global markets.
All shares have risks and M&G is no exception. For years it has been struggling to get policyholders to put more into its open funds than they take out. That matters because if fund sizes shrink, earnings may well follow.
For now the firm is winning that battle. But the risk remains, especially in choppy markets – and I think that is a fair description of 2026 so far!
Over the long term, though, I am optimistic about the outlook for this FTSE 100 share, with its yield currently over double the index’s average.
Should you invest £5,000 in M&g Plc right now?
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Christopher Ruane does not hold any positions in the companies mentioned.
