When it comes to earning passive income, filling a Stocks and Shares ISA with dividend stocks has the advantage of being uncomplicated and – potentially – a lucrative approach.

How does this work in action? Let me illustrate this with an example…

Step one: setting a goal

To start with, I’ll set myself a goal: an average monthly passive income of £1,000.

The same approach can work for a higher or lower goal. This will have a corresponding impact on the timing and/or amount of the investor’s contribution.

Step two: start making regular payments

In this example, I will assume that the average dividend yield will be 5%. This is well above current FTSE100 3% on average, but still achievable in today’s market while sticking to high-quality blue-chip stocks in my opinion.

To hit the target at this yield would require a stocks and shares ISA of £240,000. pounds.

Most people don’t have an ISA with so much money sitting idle. However, it can be built up over time, even starting from scratch with a brand up-to-date, blank Stocks and Shares ISA.

One way to do this would be to initially reinvest the dividends, which is called compounding. By depositing PLN 20,000 pounds per year and increasing it by 5% per year, the ISA will be worth over £240,000 after ten years. pounds. From this point, dividends can begin to be withdrawn as passive income.

Step three: building a stock portfolio

With money in an ISA, someone can now start buying shares. But before they do so, they should at least familiarize themselves with the basics of stock market investing, such as valuation and understanding why free cash flow matters when it comes to dividend payments.

One stock I think is worth considering right now for its dividend potential is a FTSE 100 asset management company M&G (LSE:MNG). Its rate of return of 6% is double the average of the indicator mentioned above. The payout could continue to grow as M&G aims to boost its dividend per share each year.

With a multi-million customer base across multiple markets, a robust brand and many years of financial markets experience, I believe M&G has the potential to continue to do well.

One risk I see is that volatile financial markets could tempt policyholders to take out more money than they add. M&G has struggled with this in the past.

On a positive note, the latest trade report showed that in the first quarter of this year there was a net inflow of funds into parts of its business that are still open to up-to-date investment. I will be paying attention to this critical performance indicator.

Step Four: Let the income flow!

As I mentioned above, while dividends can flow over a few months, they are initially reinvested under this plan, so the investor won’t receive them as passive income until the decade is up.

But it’s up to them. Passive income could flow much sooner if they so choose, just at a lower rate than if they were patient and took a long-term approach to regular contributions and capitalization.

Which profitable companies do we like more than M&g Plc right now?

One of our Share Advisor analysts has just published a up-to-date stock report that we believe is a must-read for any investor looking to generate potential income.

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No jargon. There is no demanding sell. Just take a close look at the revenue share we think is worth your time.

Christopher Ruane does not hold any position in the companies mentioned.