One way to use a Stocks and Shares ISA is to build passive income streams by stuffing it full of dividend shares. This approach could be used to target a certain passive income stream over time.

In this example, I will use £1,000 a month as the target.

Dividend yield and ISA size determine passive income

How large the ISA needs to be to target that £1,000 monthly passive income depends on the dividend yield. At a 3% yield (equivalent to the FTSE 100 average right now), the ISA would need to be worth £400k.

If the yield was 5%, then the ISA could deliver the desired amount at a size of £240k. Meanwhile, an ISA yielding 7% would need to have even less in it — £172k or so – to hit the target.

Focusing on quality and dividend sustainability

That might make it sound like the smart thing to do is simply to target a high yield. But it is important to remember that no dividend is ever guaranteed to last, even if it has been consistently paid for decades already.

So a savvy investor looks at a company’s business prospects and cash flows when making a judgement about what its future dividend flows are likely to be.

Building to the target over time

The standard annual contribution allowance for a Stocks and Shares ISA is £20k. So even contributing the maximum, this plan would take years to execute from a standing start. Fair enough, I believe in long-term investing and this is not some crazy overnight passive income plan.

How long would it take? At £20k a year, £240k seems like it ought to take 12 years. But things could be speeded up if the investor reinvests dividends initially – a practice known as compounding.

Putting £20k a year into the ISA and compounding it at 5% annually, it ought to be worth over £240k after a decade. At a 5% yield, that ISA could then generate an average monthly passive income of £1,000.

On the hunt for quality dividend shares

Being selective when it comes to fees and commissions could help the ISA’s performance. So I think it makes sense for someone to take some time when choosing the right Stocks and Shares ISA for them.

It also matters what shares they buy, of course. Simple risk management dictates that diversification is a wise approach and with the size of ISA we are talking about here, that is easy enough to do.

One dividend share I think investors ought to consider, if they are not averse to investing in the sector on ethical grounds, is British American Tobacco (LSE: BATS). The maker of Dunhill, Pall Mall, and a host of other brands and products, aims to grow its dividend per share annually. It has already been doing so for decades.

There is an obvious risk, though: declining rates of cigarette use and they look set to keep falling over time.

Although British American’s premium brand portfolio gives it pricing power, I still see falling cigarette usage as a risk to both revenues and profits.

Still, while declining, cigarette sales volumes remain large. The company has long experience of navigating a changing demand landscape. It has also grown its non-cigarette business extensively.

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