Passive income can feel like a distant dream for some, but the path to £500 a month from a Stocks and Shares ISA has a surprisingly straightforward starting point: the dividend yield.
That £500-a-month income target equals £6,000 a year, tax-free inside the ISA wrapper. But what size portfolio would it take to get there without relying on heroics?
The maths is simple, even if the investing journey isn’t. A portfolio with a yield of 4% would need roughly £150,000 to generate £6,000 a year. At 5%, the pot drops to around £120,000. At a more conservative 3%, it rises to about £200,000.
The tricky bit is that higher yields are rarely ‘free money’. When share prices are strong, yields are often lower as profits are reinvested in the company’s growth.
When yields look generous, the market can be signalling uncertainty about profits, cash generation, or the durability of the dividend. That’s why a dependable payout can matter more than a headline percentage.
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I’m watching NatWest Group (LSE: NWG) after its recent annual results release for the year ending 31 December 2025.
The numbers included a proposed final dividend of 23p per share, meaning a total of 32.5p for the year. That’s a 51% increase on 2024’s distribution. That came after the bank beat consensus estimates and posted a 24% jump in operating profit to £7.71bn.
In the days after those results, the share price has been choppy. As I write on 26 February, the stock is trading at £6.16 and is still shy of its 52-week high of £7.05.
Banks are typically judged on earnings and book value. On that basis, NatWest looks modestly priced: a trailing price-to-earnings (P/E) ratio of 9.1 and a 5.3% dividend yield. NatWest’s price-to-book (P/B) ratio is sitting at 1.1, which is lower than key banking peers including HSBC and Lloyds.
I think those metrics are worth a closer look for investors seeking to build a passive income. That’s despite some key risks including high regulatory scrutiny and sensitivity to interest rate changes and the health of the economy.
I find it helps to remember that most passive incomes are built gradually. Regular contributions, reinvesting dividends, and avoiding the temptation to chase the biggest yields can do a lot of the heavy lifting.