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An ISA can be an excellent platform for long-term investing. Not only does it open up the possibility of long-term share price growth, but there is also the potential for some serious passive income. Again, I am taking the long-term view.
If someone had a spare £20k in a Stocks and Shares ISA now, here is how over time they could aim to turn it into a passive income machine generating an average of £1,250 a month.
Setting up a four-figure monthly passive income
If that £20k ISA was invested at a compound annual growth rate of 8%, after 30 years it would be big enough that an 8% yield would equate to over £1,250 a month in passive income.
Put like that, I think this approach seems pretty simple.
Of course one key question is: is an 8% compound annual growth rate feasible? Not just in any given year, but over a 30-year timespan that could well see multiple market cycles?
Sticking to the basics
I think it is.
Not only that, but I actually believe it is possible while sticking to a carefully chosen set of well-known, long-established, blue-chip businesses with a proven ability to generate profit.
So, this approach is not based on identifying the next big thing. It is as simple as identifying attractively priced businesses that are already doing well and letting time work its magic.
One share to consider
For example, one share investors could consider for an ISA is one I recently bought: plant hire company Ashtead (LSE: AHT).
But wait, you may think. Ashtead’s dividend yield is 2.6%. What about the 8% target I mentioned above?
Remember – that target is a compound annual growth rate. That can come from dividends and share price movement. Over the past five years, the Ashtead share price has soared 88%.
Now, past performance is no indicator of what might happen in future. After all, a weakening economy could mean less money being spent on construction projects. Ashtead’s strength in US public works projects could be a double-edged sword.
But it has honed its business model and a current strategic plan aims to make it even stronger. Ashtead has a large customer base, extensive network of depots, and a deep understanding of the dynamics within its industry.
Don’t let the income train leave the station!
None of the above is rocket science. In fact, I do not think it is even particularly complicated.
But if someone reads it and does nothing, it just remains a passive income idea. That four-figure monthly income will not materialize.
A useful practical first step an income hunter could take would be to choose the right Stocks and Shares ISA for them to use as part of the plan. Next, they could start looking for the right sorts of shares to buy.
