Wouldn’t it be nice to have a passive income of £5,000 per month, without having to lift a finger?

FTSE 100 stocks made an average annual return of 6.9% over the past 20 years. So we’d need a Stocks and Shares ISA pot of close to £870,000 to earn that amount at that rate (which is not guaranteed, mind). The trouble is, if we take out the whole return, then the pot’s value would dwindle with inflation.

To be able to take out £5,000 a month and leave enough behind to grow in line with inflation? We’d need to reach a bit over £1.22m.

That’s a lot, and it might be hard to believe it’s an achievable target. But according to the most recent figures, over 4,800 ISA investors in the UK have built up more than a million. That’s 20% up on the previous year. And the biggest has reached over £11m.

Time conquers all

The key thing here is time. Time in the market beats timing the market, as the old saying goes. Some of those ISA millionaires might have been a bit lucky with their timing on occasions. But it’s really not the way they achieved their success.

No, various surveys show that these are not investors who are good at spotting the next big thing. And they don’t get in and out at the right time. Instead, they spread their investment cash between funds (including index trackers), investment trusts, and solid blue-chip stocks like Shell, Lloyds Banking Group, GSK…

They also put a greater proportion of their money in investment trusts than the average ISA investor. Over at AJ Bell, City of London Investment Trust (LSE: CTY) is a popular choice. So I’ll go with that as an example. Well, also because it’s one of my favourites, having raised its dividend for 58 years in a row.

City of London is currently on a forecast dividend yield of 4.8%. I’ve no idea what will happen to its share price. But if that can keep pace with inflation at a long-term 2%, then we’re looking at the kind of return I spoke of above.

Compound it!

An ISA allowance invested with these returns could see us build a £1.27m pot in 25 years. An invested total of £500,000 would have generated a tax-free profit of £770,000. But taking out and spending the dividends would have cut the total pot by more than half, and slashed the gains.

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.

I wouldn’t put all my cash in one investment. Not even City of London Investment Trust with its holdings in HSBC Holdings, Shell, Unilever, BAE Systems, and many more FTSE 100 companies I consider safe. It’s still an investment fund managed by one company. And if it failed to raise the dividend one year, the share price could suffer.

But I think this does help show the most common route to ISA millions. Invest as much as we can in top quality stocks, reinvest all dividends, and keep going as long as possible.