One way to earn passive income is to buy shares of dividend-paying companies. This can turn your Stocks and Shares ISA into a source of regular income.

How lucrative can it be? The answer is that it can generate thousands of pounds of income per month. But whether this happens depends on two or three factors.

Factors determining income

First, how much money is invested. The second factor is the dividend rate. Third, time frames may play a role. Maybe someone has enough spare cash to start earning their target income today.

But if they don’t – in fact, even if their ISA is empty today – they will be able to build towards their goal over time.

For example, if an ISA earns 5%, you’d have a monthly passive income of £2,000. pounds (24 thousand pounds per year) would require funds of 480 thousand. pounds. However, instead of investing this money straight away, someone could invest what they can afford each year and reinvest the dividends (called compounding) to enhance the size of their ISA.

Starting from scratch and investing 20 thousand pounds a year it would take 17 years for the value of the Stocks and Shares ISA to exceed £480,000. pounds. This would be enough to generate an average of 2,000. pounds per month of passive income at a rate of return of 5%.

Making wise choices

Although I assume the rate of return will be 5%, this is just an example. With a lower rate of return, you will have to invest more money. A higher rate of return may require less money in the ISA to generate the same passive income.

But does this mean that an investor should chase high returns? Not necessarily!

No dividend will last forever, so it’s crucial to not only look at the dividend today, but also how likely the company is to pay it in the future.

Another factor that may impact the returns you receive from such a passive income plan is ISA costs and fees. An experienced investor should consider the options available when it comes to choosing the right ISA for their needs.

Here’s a dividend worth considering!

One stock that investors should consider for its passive income potential is FTSE 100 manufacturer British-American tobacco (LSE: BATS). The company owns premium brands such as Happy Stroke. This, combined with the addictive nature of nicotine, gives it pricing power. British American can exploit this pricing power to generate significant cash flow, supporting its dividend.

The current dividend yield is 5.6%. The company’s goal is to enhance its dividend per share every year, as it has done for decades.

Will this continue? The company is struggling with sinking cigarette sales volumes. I consider it a constant risk. Still, given pricing power and the growing non-cigarette business, I believe British Americans may be able to manage this risk and turn a profit over time.