Turning your precious time into pounds is making money the strenuous way, which is why investing in passive income is so appealing. I’ve always loved the idea of ​​money automatically landing in my bank account whether I’m sleeping or sunbathing on the beach. I’m sure I’m not the only one!

A fantastic way to generate passive income is to buy dividend shares in a Stocks and Shares ISA. Investors do not pay capital gains tax or dividends on investments hidden within an ISA wrapper. This can boost your potential profits.

According to a study conducted by the financial services giant Legal and general information (LSE:LGEN) the happiest retirees earn an average annual passive income of £20,400. That’s £1,700 a month. How large does an ISA portfolio need to be to achieve this goal? Let’s analyze the numbers.

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.

Buying happiness sustainably

The key figure to focus on is the dividend yield on the shares an investor holds in their ISA. The higher the profitability, the lower the portfolio value may be. But beware, dividends are not guaranteed, and any successful passive income plan should include potential dividend cuts.

A wise strategy may be to invest in FTSE100 index fund, which today gives a yield of 3.12%. With this method, a total investment of £653,847 will provide a monthly passive income of £1,700.

However, for many, this plan may be too conservative. A carefully selected, diversified basket of high-quality dividend stocks could easily provide a higher rate of return, potentially saving investors valuable time and money.

For example, at a rate of return of 5%, an investor would only need a portfolio of £408,000. That’s almost £246,000 less to spend in an ISA than would be required using a pure index approach!

Starting from scratch, with a total annual return of 8%, this target could be achieved within 20 years by investing £688 in an ISA each month and reinvesting the dividends. This is an achievable path to solemn passive income within two decades.

Highest dividend share in the UK

One FTSE 100 stock worth considering for its earnings potential is the company that created the elated retirement study I mentioned earlier – Legal & General. This asset manager and retirement services provider yields a whopping 8.8%.

Dividend income is the crux of the case for investing in these stocks. The company’s commitment to a progressive dividend policy is underpinned by a solid Solvency II coverage ratio of 217%, indicating a robust balance sheet.

That said, the forecast dividend coverage is only one times earnings. Conventional investing wisdom suggests that ideally this ratio should be around two to provide a comfortable margin of safety. If future earnings disappoint, dividend cuts cannot be ruled out.

However, the thing that makes me particularly bullish about Legal & General shares is the dynamically growing annuity market. In the first half, the group closed £3.4 billion of pension risk transfer business, more than double the £1.5 billion achieved last year. The company has identified a £1 trillion global market opportunity over the next decade, so the future looks very brilliant.

Legal & General manages assets worth £1.1 trillion, making it vulnerable to stock market declines. This is a concern amid growing fears of an AI-fueled bubble. However, overall I think the company is still one of the best FTSE 100 income stocks to consider right now.