A Stocks and Shares ISA packed with dividend-paying FTSE 100 shares offers one of the most hands-off routes to generating a meaningful passive income.
Once an investor selects their holdings, the portfolio can largely run itself, with dividends accumulating and compounding over time without constant intervention.
The size of the income ultimately depends on two key factors: how large the portfolio grows to be, and how much yield it generates.
Investing £500 a month, or £6,000 a year, remains well within the £20,000 annual ISA contribution limit currently allowed under UK rules.
According to figures from Unbiased, a Stocks and Shares ISA has returned an average of 9.64% a year over the last decade, compared to just 1.21% for a Cash ISA.
At that 9.64% annual growth rate, a £500 monthly contribution could grow to £93,989 after 10 years, £329,911 after 20 years, and £922,099 after 30 years.
Push that out to 40 years and the portfolio could swell to approximately £2,408,546, a figure that rises further if contributions increase with inflation or lump sums are added along the way.
Applying a 6% yield to a £2.4m portfolio produces an annual passive income of £144,513, while a 5% yield would return £120,427 and a 4% yield would deliver £96,342.
Seven FTSE 100 stocks currently pay income of 6% or more, with insurer Standard Life (LSE: SDLF) standing out with a trailing yield of 7.3%.
Originally known as Phoenix Life, Standard Life built its business by acquiring legacy pension schemes closed to new members and running them more efficiently before expanding into retirement savings, bulk annuities, and private markets.
The company has increased its dividend every year for a decade, and last year reported a 15% rise in adjusted operating profit to £945m, beating analyst expectations of roughly £937m.
The Standard Life share price climbed 16% over the past year, providing investors with capital growth on top of its already attractive income.
However, future dividend growth is forecast to slow to just 2% a year, and dividend cover sits at a relatively thin 1.3 times.
The company’s Solvency II ratio, a measure of capital strength, stands at 176%, which is adequate but leaves some room for improvement according to analysts watching the stock.
Income-focused investors considering Standard Life should weigh its generous yield against those concerns, and balance high-income holdings with stocks that also carry stronger growth prospects.