Here’s an enticing vision: building a Stocks and Shares ISA that works harder than you do, with dividends rolling in to provide a baseline passive income stream, totally on autopilot. 

Admittedly, it sounds far-fetched at first. But because of the way the ISA works in the UK, any income you draw from it doesn’t face income tax or capital gains tax. That makes achieving this enticing vision far more likely. 

Here, I’ll break down what size ISA pot you would need. Oh, and because The Twelfth Magpie is all about building wealth through stock market investing, I’ll also highlight a 4.9%-yielding dividend share that I think is worth considering today. 

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.

What is the National Living Wage today?

Currently, the National Living Wage for workers aged 21 and over is £12.71 per hour. So doing a 40-hour work week on this would result in annual income of roughly £26,400 before tax. 

Remember, someone generating this much passive income in an ISA would be better off than a tax-paying worker. However, inflation will naturally eat away at purchasing power over time. 

For simplicity’s sake, I’ll use £30,000 as our target figure. 

Some assumptions

To generate this much a year, the ISA will clearly need to be large. Moreover, because the annual contribution is £20k, it’s going to take time to reach the target. 

How long will depend on how much someone invests, their average rate of return, and the portfolio’s ultimate dividend yield. Given these variables, we’re going to be making some assumptions. 

The first is that someone can afford to invest £13,000 per year (or £1,083 every month). Admittedly, this might be hard to achieve due to today’s cost-of-living crisis, but it’s well within the ISA allowance. 

Next, I’m going to assume an annualised 9% return (with dividends reinvested). This isn’t assured, of course, but it’s the ballpark figure for the FTSE 100 over the past 10 years (around 8.8%) and far below the S&P 500‘s total return (15%). 

Finally, let’s assume the ISA portfolio eventually yields 5%. With this figure, an investor wouldn’t have to take on excessive risk because ideally (though again, not guaranteed) most dividend stocks will increase their payouts over time.

Putting all this together, it would take just over 19.5 years to reach £30k a year in passive income.

What about that 4.9%-yielding stock?

The dividend share I’m thinking about is Hollywood Bowl (LSE:BOWL). Found in the FTSE 250, it’s the UK and Canada’s leading ten-pin bowling operator.

There are a few things I like about this stock. For a start, it offers a forward dividend yield of 4.9%, backed up by strong cash generation and profits. This prospective yield is higher than the FTSE 250 average (around 3.5%).

Also, the stock’s fallen 17% since 2024. While this reflects the UK’s ongoing inflation crisis (which add risk to the company’s growth), Hollywood Bowl’s forward earnings multiple of 12 strikes me as good value for a market-leading firm that’s still growing.

Speaking of which, revenue rose 9.5% to £141.5m in the six months to 31 March, with 2.3% like-for-like sales growth. And Hollywood Bowl has ambitious plans to reach 130 centres by 2035, up from 93 today.

I think the stock offers an attractive mix of growth, value and dividends, making it one to consider.

What income stock do we like better than Hollywood Bowl Group Plc right now?

One of our Share Advisor analysts has just released a brand new stock report that we think is a must-read for any investor looking to try and generate potential income.

And the best bit is that you can see if for yourself, right now, absolutely free of charge!

No jargon. No hard sell. Just a clear look at an income share we think is worth your time.

Ben McPoland has no position in any of the companies mentioned.