An ISA can be used to earn passive income by simply using it to hold some dividend-paying stocks.

Sounds plain? This may be true – but how much passive income can this approach generate?

ISA size, performance and time frame

This depends on three key elements.

Firstly, how much money is in the ISA? Second, what is its average performance? This value can rise or fall over time, even without changing your share holdings, because dividends can rise and fall.

The third factor is the time frame.

Goal: £500 a month

I will make this happen with an example.

Let’s assume someone wants to achieve an average of £500 in passive income per month. This adds up to £6,000 a year.

For example, I will assume a dividend rate of 6%. That’s more than twice the electricity FTSE100 profitability of 2.9%, but in the current market I think it is achievable by sticking to high-quality companies.

At 6%, annual passive income of PLN 6,000. pounds would require an ISA of 100,000. pounds.

Looking long term

However, an alternative may be to gradually deliver money via drip.

Let’s say an investor invested £100 a week and instead of paying out dividends, they reinvested it – this is called compounding.

By putting £100 a week into an empty ISA and increasing it by 6% a year, it should be worth over £100,000 after 13 years. pounds. At this point, a 6% dividend yield could provide the target passive income I’m using as an example.

Choosing the right ISA can assist!

One thing that can affect returns is brokerage commissions, fees and other fees.

That’s why it’s worth spending some time hunting down the best stocks and shares ISAs.

Each person will have their own criteria. Fortunately, there are many different stocks and shares ISAs available.

Hunting for high-quality dividend stocks

As a long-term investor, I like to find shares in top companies with proven business models that I can put into my ISA and then hold for years.

One stock I think investors should consider is the FTSE 100 insurer Aviva (LSE: OFF).

Its profitability of 5.7% is already close to the 6% I mentioned above. I think it can continue to grow as it has in recent years, potentially increasing potential profitability.

This is of course not guaranteed: in 2020, Aviva suffered a painful dividend cut.

Aviva is the largest insurer in the country, so one risk I see is that smaller rivals will try to take some of its market share by competing on price, eroding profit margins across the industry.

But I also see market leadership as a source of strength.

It gives Aviva economies of scale thanks to its huge customer base.

Additionally, it allows a company to attempt to sell more than one service or product to a customer. This strategy worked for Aviva.