I am convinced that I know the best chances of building passive income from long-term investments. I believe it must be a stocks and shares ISA.

This opens me up to more risk than a Cash ISA as they offer guaranteed interest rates. At least for the duration of the last contract. However, once the Bank of England (BoE) brings inflation down to its target of 2%, I think we will be lucky if Cash ISA rates reach well above 1%.

I don’t see much point in trying to save tax on this level of income rather than on the whole FTSE100 Over the long term, returns average around 6.9% per year. Of course, this is not guaranteed, but there is a story behind it.

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Evil spells

To be able to take home £10,000 a year from my ISA, I would like to be able to not deplete my capital too much. If the BoE hits its inflation target, I would like to leave enough money in my ISA.

This suggests I could take 4.9% of the average 6.9% per year and leave the remaining 2% to keep up with rising prices. So how much might I need?

My calculations put the pot at around £204,000. If the British stock market continues to grow as it has for the last century, I should be able to take my £10,000 of that and leave enough to keep up with inflation.

What’s the best way to take cash? To me, this is where dividends come in. Let’s take FTSE 100 stocks as an example.

Bank dividends

I’ll go get it Lloyds Banking Group (LSE: LLOY) because among my stocks the dividend is closest to the target yield of 4.9%.

In fact, Lloyds is currently forecasting a dividend yield of 5.4%, so I could even leave a little behind to rebuild for next year and beyond.

But this brings me to my first major need for caution. Dividends are never guaranteed and Lloyds is a good example of this. The bank had to suspend dividend payments when the pandemic and stock market crash broke out in 2020.

In fact, most of my dividends have gone down this year. So if I were making passive income, I would have to sell some shares to reach my goal.

Financial crash

Looking back to the 2008 financial crash, Lloyds experienced much more pain then and it took some time to return to progressive dividends.

What is the way to minimize this risk? In a word, diversification. I especially like investment funds and I have several of them. I always try to keep a variety of stocks from different sectors.

Oh, and I’m basing these numbers on historical returns, which we may not achieve in the future. I think it’s better to aim a little higher than not achieve the goal.

For most of us, it may take several decades to build a pot worth £200,000 or more. Fortunately, I started investing in ISAs a long time ago. And I think my goals are realistic.