Some passive income ideas are simpler than others – a plot simpler.

For example, my own approach is to buy blue-chip stocks in proven companies that will hopefully allow me to pay regular dividends for years, or even decades, without lifting a finger.

I like the fact that I benefit financially from immense companies that have already proven they can make money.

But what if I earn some passive income and then have to pay a immense part of it to the tax office? To avoid this, I operate a Stocks and Shares ISA.

However, even with an ISA, fees and costs can eat up your dividend income. Therefore, I believe it makes sense for each investor to make their own choice as to which ISA will best suit their individual situation.

Please note that tax treatment depends on each client’s individual situation and may change in the future. The content of this article is for informational purposes only. It is not intended to be and does not constitute any form of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

Determining the amount of dividend income

Three factors come into play when determining how much passive income a person can expect from their stock holdings.

The first one is How many someone is investing. In this example it is 20 thousand. pounds.

Secondly, it appears average dividend rate earned on the wallet. This is the annual dividend expressed as a percentage of the investment. For example, £500 a year equates to a rate of return of 2.5% on £20,000. pounds. This seems uncomplicated to achieve to me and is actually well below average performance FTSE100 shares now.

In contrast, £5,000 would mean a profit of 25%. This is not only significantly higher than any FTSE 100 share offering, but also so high that I see it as a warning sign. If a stock offers a yield of 25% (and some occasionally do), it often suggests that the market is expecting a dividend cut.

But there is a third factor at play – how long the investor holds the shares.

If the investor initially reinvests the dividends (a basic but effective financial technique known as compounding), the long-term rate of return may be higher than the current rate.

For example, combining 20 thousand pounds ISA with an interest rate of 7% per annum, after 19 years it should generate a passive income of over £5,000 per annum.

Yes, that’s a long wait. However, this is a earnest, long-term approach to investing, not some absurd get-rich-quick scheme.

Finding stocks to buy

The good news is that I think today’s market offers a realistic opportunity to achieve an average annual yield of 7% while sticking with the blue-chip FTSE 100 stocks.

Investing in a wide variety of stocks reduces the risk of disappointment, for example by reducing the dividend.

One dividend stock that I think investors should consider is M&G (LSE:MNG).

M&G’s profitability is 10%. The company’s goal is to maintain or escalate the dividend each year. There is no guarantee that this will happen in practice, but the asset manager has increased its dividend per share every year in recent years.

Given its immense target market, millions of customers across multiple markets, sturdy brand and deep industry experience, I think M&G could continue to deliver.

The risk is that customers take out more money than they put in. The same thing happened in the core business in the first half of last year, and that’s a risk I’m watching.

Meanwhile, as an M&G shareholder, I continue to be attracted by the prospects of passive income.