Here’s how £3,000 left in an ISA can generate an income of £90, £900 or £9,000 a year!

Just how much income does one get from using an ISA to build a portfolio of shares?

The question is along the lines of asking how long a piece of string is.

That’s because the income an individual can make depends on how much they invest, what their rate of return is and their timeline.

To keep things simple, I’ll use an example that keeps the first two variables the same.

Imagine someone invests £3k in an ISA.

Now imagine they earn an average yield of 6%. That is beyond current capacity FTSE 100 2.9% yield, but I think it’s still doable in today’s market while sticking to high-quality blue-chip stocks.

Taking a long-term approach

The only variable left in this example is timframe.

Say an investor wants to start earning income as soon as possible. A 6% yield on £3k should produce £180 in dividends per year.

The payouts aren’t always evenly split, but at that rate, it’s possible they could get £90 of income over the next six months or maybe longer, depending on when the shares pay dividends in the annual cycle. That is different for different stocks.

But what if they are willing to wait a long time, reinvest dividends (we call this compounding) until the pot is big enough, and withdraw it as income?

By doing so, the initial £3k could grow to a size large enough to generate £900 of income per year after 28 years. Or, if someone is willing to wait until age 68, they can earn £9k in passive income per year.

I know: 68 years is a long time to wait, even for a long-term investor. But when a parent starts investing in a new baby, it’s the right time.

The point is that the investor can choose which time frame is right for them. They can even decide how much to invest.

There is some flexibility in terms of how much income they can get, but I like to be flexible and have equity shares for that kind of income.

Getting started can be easy

With cash in hand, or saving it over time from zero, one can start investing. But that requires a way to buy and hold shares.

Different ISAs have different structures. Fees and commissions can eat into profits even next year, let alone the next 68!

So it pays to take your time when comparing available Shares and ISA Shares.

Finding dividend shares that you can buy

The investor must also decide which stocks to buy. Stocks aren’t guaranteed to last, even if they’re cool now.

One income share that I think is worth considering, for investors who are no longer rejecting it on ethical grounds, is British American cigars (LSE: BATS).

Owner of products like Pall Mall cigarettes and Wake up vapes have a global history, economies of scale and premium products with powerful pricing.

So the company is able to generate chunky free cash flow to help fund dividends. It yields 5.5% – and has grown its dividends per share annually for decades.

Refusing to use tobacco already eats up revenue and is also harmful to profits.

But the business’s pricing power and non-tobacco expansion could help it adapt.