It’s often confusing to decide what sort of equities to put in a Stocks and Shares ISA. In truth, there’s no definitive answer. The right selection relies on each individual investor’s objectives and risk tolerance. However, for those aiming for passive income, dividend shares are often found to be one of the best methods of securing stable and regular returns.

With a Stocks and Shares ISA, UK residents benefit from tax free gains on any investments up to £20,000 a year.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

With that said, let’s investigate ways to kick off and investment journey that could lead to a £100-a-month steady income stream.

An ISA income strategy

The UK stock market tends to deliver slightly less than 8% on average per year, with dividends included. That’s based on the performance of the FTSE 100 and FTSE 250 over the past few decades. It’s common practice to draw down only 4% from an income portfolio each year, so as to avoid disrupting the growth trajectory.

We know that an investor would need to bring in £5,200 a year to equate to £100 a week. That works out to 4% of £130,000.

That’s a lot of money to have in an ISA. It’s way above the yearly tax-free allowance, which in itself is a lot to save per year. Suffice to say, it’ll take some time to build up.

Let’s assume the average investor can afford to contribute £300 per month (£3,600 a year). It would take over 17 years to get there based on the 8% average return (with dividends reinvested). That’s a long time! However, optimal stock selection could help reduce this time. It’s not impossible for a well-formulated UK stock portfolio to achieve annual returns upward of 10%.

Picking top stocks

To beat the average market returns, it’s important to pick the right stocks. A few financial factors to consider are profit margins, debt levels and cash flow. Additionally, it’s important to assess the long-term viability of its products or services versus competitors and its particular advantages — also known as the ‘moat’. 

Finally, an experienced management team with transparent practices and strong corporate governance is a plus.

One top UK share investors may want to consider is London Stock Exchange Group (LSEG).

The company provides financial data about the UK’s stock market. With a wide moat and solid market position, the growing demand for market analytics puts the company in good stead for future growth. After acquiring data analytics firm Refinitiv in 2021, it’s gone from strength to strength.

It’s been performing almost too well lately, up 32% in the past year. Meanwhile, earnings have lagged behind, leading to a price-to-earnings (P/E) ratio near 100. If the next earnings call falls short of expectations, there’s a high risk the share price will drop in the short term.

Long-term prospects look solid though, supported by strong management and a growing demand. Revenue for 2024 is expected come in at £8.6bn, up 8% from 2023. With a growing subscription service, cash flows are increasing and driving shareholder returns. Over the past 10 years, it’s delivered annualised returns of 16.78%.