£20k ISLAND? Here’s how that can generate £574 a month in passive income!

Using a Stocks and Shares ISA to get income in the form of dividends is something that countless investors do. I am one of them.

With a £20k ISA, I think an investor can target passive income £574 per month.

It will take time, however: this is a long-term plan.

Creating major revenue streams

Let me start with the math, by way of explanation.

Investing £20k at an average yield of, say, 6% would generate £1,200 a year in passive income.

But another way would be to invest that money and then and invest in dividends along the way.

That is known as compounding.

At a time of their choosing, the investor can stop reinvesting the shares and start taking them as income.

Sticking to the example above, compounding £20k at 6% per annum for ten years would mean the ISA would be worth around £35,817. At a 6% yield, that would generate £2,149 in dividends, or around £179 a month.

Rolling a snowball downhill

But over time, things get complicated even better.

Investor Warren Buffett compares consolidation to a falling snowball. The higher the hill, the more snow can collect.

So in my example above, after 20 years, the monthly income will be there £320 per month. After 30 years, it will be £574 on average every month.

Finding the basics in the area

Before doing any of that, however, comes the issue of what the Stocks and Shares ISA will be used for.

There are a number of options available and I think it makes sense for an investor to consider what seems to be the best fit for them. No two investors are the same.

Hunting for high-quality stocks to buy

Although I think a 6% yield is achievable even if we stick to blue-chip FTSE 100 shares, is significantly higher than the FTSE 100’s current average yield.

Here’s an example of one FTSE 100 share with an above-average yield that I think investors hunting for cash entry should consider. Legal & General (LSE: LGEN).

The insurance has a yield of 8.9%. It has raised its dividend each year for the past few years and plans to continue doing so, although what actually happens to the company’s payout ultimately depends on its financial performance. Nothing is guaranteed to last.

Legal & General cut its dividends following the 2008 financial crisis and I see a risk of that happening again if financial market turmoil leads more policyholders to exercise their policies earlier than expected.

But I also see a lot to like here.

The insurance market is huge and Legal & General’s focus on retirement gives you a clear strategic direction. It has a proven business model, a strong brand, a large customer base, and has been consistently profitable in recent years.

I personally own this active income company in my portfolio for those reasons.