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A regular second income stream can transform peoples’ retirement prospects. One of the most effective ways to build this is through a Stocks and Shares ISA. All capital growth and dividends are free from income tax and capital gains tax, which is a huge long-term advantage.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Each tax year it’s possible to invest up to £20,000 into an ISA. That’s generous, but the real question is how much has to be in the pot to generate a sizeable passive income of, say, £3,000 a month, which works out at £36,000 a year?
Building an investment pot
Let’s say an investor creates a balanced portfolio of higher-yielding FTSE 100 dividend stocks, paying average income of 6% a year. If they took all their dividends as income, they’d need £600,000 to generate that £36k stream. That’s a lot, but investors who start early and stick with it can get close. The effort’s worth it as the results should be life-changing.
Over 30 years, investing £425 a month and generating an 8% average annual return could potentially deliver £625,000. So which shares to buy? I’d aim to build a balanced portfolio of around 15-20 shares, mostly plucked from the FTSE 100 and offering dividends as well as growth.
National Grid shares for starters
National Grid‘s (LSE: NG.) often seen as a reliable portfolio-building block. It operates electricity and gas transmission networks in the UK and US, and its regulated earnings provide a steady stream of cash. Share price growth’s typically steady but modest. The stock’s up just 6% over the last year and 27% over five years.
For many, the big draw is the dividend. It’s increased every year this century, averaging 2.6% annual compound growth since 2010. That strong run came to a halt in 2025, when the payout was cut by 13.7% to 46.72p per share, as the group reset its dividend policy to fund its massive £60bn capital programme, which runs to 2029. It has to pour billions into building green infrastructure.
National Grid remains popular with income seekers, but it faces huge spending demands that could weigh on future distributions, just as last year’s £7bn rights issue demonstrated. The yield’s now about 4.5%, down from the 5.5% investors had come to expect.
Its latest full-year results (15 May) nonetheless showed statutory profit before tax rising 20% to £3.65bn, while underlying earnings per share edged up 2% to 73.3p. The board reaffirmed guidance for 6-8% annual growth in underlying earnings per share.
Balance dividends and income
The shares now trade on a price-to-earnings ratio of 18.5. That’s a little pricier than it was. I think they’re worth considering but may be more volatile than before. Holding around 15 different stocks across varied sectors spreads the risk so that one underperformer doesn’t derail the whole plan.
Over decades, the miracle of compound returns can quietly multiply wealth. Building a £3,000 monthly second income won’t be quick or easy, but even falling short should still provide far greater financial freedom than not investing at all.
