Many investors dream of generating enough passive income to cover living costs or more. A monthly income of £4,000 — or £48,000 a year — might seem ambitious, but it’s entirely possible with a disciplined long-term approach and, importantly, the power of compounding inside a Stocks and Shares ISA.

To begin, let’s get the numbers straight. To sustainably draw £48,000 annually from investments yielding 5% would need a portfolio worth around £960,000. While that’s a substantial figure, it can be achieved by steadily investing over time — and reinvesting dividends along the way.

Let’s assume an investor is starting with £20,000, and they decide they’re going to contribute £500 monthly in order to help the portfolio grow. Now assuming a 10% annualised growth rate, that portfolio could hit £1m in 26 years.

Of course, 10% might sound like overly strong growth, but it’s achievable. However, investors should be wary that poor investment decisions typically result in losing money. An investor may be able to reach that £1m mark sooner by contributing more to their portfolio, even with a more conservative targeted growth rate.

Making it work

Naturally, the required capital depends on the yield. Higher-yielding investments may reduce the capital needed, but they often come with more risk. A portfolio yielding 6% would need around £800,000 to generate £48,000 annually. However, total return and capital preservation should always be prioritised over yield alone.

Diversification’s also key. The FTSE 100 offers a host of strong dividend paying stocks, but investors should consider various income opportunities when they’re looking to withdraw a passive income from their portfolio. This includes exploring various geographies, not just the UK.

What’s more, doing this through a Stocks and Shares ISA means everything is shielded from taxation. No tax on capital gains and no tax on income.

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.

Investing for growth

Most of us aren’t going to be anywhere near having £1m in our ISAs. So how do we get there? Well, a popular strategy would be to start investing in one or two handpicked stocks each month. This approach strives for diversification but gives investors a chance to beat the market.

Melrose Industries (LSE:MRO) looks like a stock with real potential and worthy of consideration. It’s a supplier in the aerospace industry, with sole source positions on 70% of its sales.

The company doesn’t usually make headlines, but that’s part of the appeal. It’s steadily growing its high-margin aftermarket revenues, and it’s benefiting from many of the supportive trends that have taken Rolls-Royce shares higher in recent years.

The shares are trading much cheaper than giants like Rolls-Royce and GE, even though Melrose’s management expects its earnings to grow at 20% annualised growth in the years through to 2029.

However, challenges remain, including supply chain issues and some hefty net debt. But with a strong business model and clear economic moat, this is a stock that deserves a close look for anyone interested in steady, long-term growth. It’s now my largest holding.