Just how lucrative can an ISA be when it comes to passive income?

Taking a long-term view can make it surprisingly lucrative.

For example, on a 30-year timeline, a £20k ISA could produce £574 per month of passive income. That totals £6,892 per year – equivalent to over one-third of the initial investment, every year.

Here’s how.

Being ambitious but realistic when setting goals

That assumption is based on a compound annual growth rate of 6% for 30 years, after which it presumes a 6% dividend yield from the ISA.

Is 6% achievable? I think the answer is yes, even while sticking to proven blue-chip shares.

Thirty years is a long-term time horizon, so will likely include both good and bad periods in the market – potentially prolonged ones.

The compound annual gain includes not only any dividends but also capital gains. However, capital losses could eat into it.

Another factor is fees, commissions, and other charges. Over the decades even small-seeming costs can add up and badly eat into returns, so it makes sense to spend some time comparing options when choosing a Stocks and Shares ISA.

On the hunt for an 6% compound annual gain opportunity!

Even in the short run but especially in the long run, an investor will have to face some disappointments.

That is why it is important to keep an ISA properly diversified. That is simple to do with a £20k ISA, which could comfortably be spread over five to 10 different shares.

So the 6% target is a team effort. Not all shares need to do that well, as long as others in the portfolio make up for it.

One share I think is worth considering now for its long-term potential is FTSE 100 Twinings blender Associated British Foods (LSE: ABF).

Long-term opportunity

Past performance is not necessarily a guide to what to expect in future.

Still, at first glance the 22% decline in Associated British Food’s share price over the past five years is hardly reassuring. Yes, the 3.7% dividend yield is attractive – but what is going on with the share price?

ABF is not some hot growth share and possibly never will be. But I think its share price fall means it is now attractively priced.

That is because the price largely reflects what I see as short-term challenges for the company, such as rising ingredient costs, weak markets for some commodities, and uncertainty eating into consumer spending.

But I am a long-term investor and taking the long view, I think the current price neglects the company’s deep strengths.

It is a conservatively run, proven player in a market with resilient demand. Plans to demerge Primark will allow the company to focus on its core food business, where premium brands give it pricing power and deep experience lets it run an effective operation.

I reckon ABF’s performance over time will be solid, but that is not reflected in its current share price.

Should you invest £5,000 in Associated British Foods Plc right now?

When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Associated British Foods Plc made the list?

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