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Dividend shares are a wonderful technique to earn passive earnings. That’s particularly the case when held in a Shares and Shares ISA, as dividend taxes don’t apply.
The FTSE 100 is residence to many world-class, established earnings shares. For example, Aviva (LSE:AV.) presently affords a chunky 6.5% dividend yield.
If an ISA consisted solely of Aviva shares, how huge wouldn’t it must be to earn £20k a yr in dividends? Let’s crunch some numbers.
My trusty calculator tells me it might to be price a whopping £308k to attain that focus on in 2026/27.
It’s a sizeable sum to many. That stated, there’s a far cheaper technique to attain this passive earnings objective.
The magic of dividend shares comes from earnings that grows, reinvestment of dividends, and permitting time to do a lot of the onerous work.
Please be aware that tax therapy is dependent upon the person circumstances of every consumer and could also be topic to alter in future. The content material on this article is supplied for data functions solely. It’s not supposed to be, neither does it represent, any type of tax recommendation. Readers are chargeable for finishing up their very own due diligence and for acquiring skilled recommendation earlier than making any funding choices.
Path to a five-figure passive earnings
Think about this instance. An investor buys £5,000 of Aviva shares in the beginning of yearly. It has an extended historical past of accelerating dividends and has a said mid-single-digit coverage.
Conservatively, we are able to assume funds rise by 5% a yr. Let’s assume a beginning yield of 6.5%, and all dividends can be reinvested inside an ISA. To be extra-conservative, let’s additionally assume its share worth doesn’t develop over time.
If an investor does this constantly for 15 years, they’d have added £75,000 to the ISA. However the portfolio could be price £176,946. As well as, it might be throwing off £20,176 in dividends. That’s over £1,680 a month in passive earnings.
YrWhole money investedDividend earnings that yrPortfolio worth at year-end1£5,000£325£5,3255£25,000£2,279£31,12710£50,000£7,446£81,28915£75,000£20,176£176,946
A strong underlying enterprise
Word that there’s extra to dividend shares than simply dividends. Dividends are usually paid from earnings, so a strong underlying enterprise is vital.
Aviva’s working income surged 25% to £2.2b in 2025. The 2026 targets had been hit a yr early, and administration launched a £350m share buyback programme.
Issues are trying good for this London-based insurer. It’s a capital-light enterprise and advantages from a rock-solid stability sheet.
And the larger image is that it advantages from an ageing inhabitants, wealth progress, and AI-driven efficiencies throughout its companies.
For affected person buyers, I believe it might look compelling.
Diversification is sensible
However keep in mind that even dependable dividend shares can face shocks. A chronic weak financial cycle might sluggish earnings. A pointy change in rates of interest might influence a lot of Aviva’s enterprise areas. And regulatory adjustments to pensions and insurance coverage merchandise can requirement changes.
Dividends aren’t assured, and it’s additionally why an investor may contemplate diversifying throughout a number of earnings shares. The FTSE 100 is residence to a number of wonderful choices and spreading funding throughout a number of from completely different industries avoids placing all eggs in a single basket.
As I prefer to say, there’s loads of fish within the Footsie.
