£500 monthly income from a Stocks and Shares ISA? Here's the way!

What type of companies should investors buy from their Stock and Shares ISA? The answer varies depending on the investor's goals and risk tolerance. However, for those looking for a small income, holding dividend stocks within an ISA is a proven and profitable strategy.

With that in mind, let's explore how you can start earning £500 every month from scratch.

Opening an income ISA

On average, the UK stock market typically delivers around 8% of total returns each year. At least, that's the long-term performance of FTSE 100 shows. And a general rule of thumb is to withdraw only about 4 percent of the portfolio each year for income. That way the portfolio can still grow over time.

Let's stick to this commitment. Withdrawing £500 a month equals £6,000 a year. And following the 4% rule, that would require the investor to have a Stocks and Shares ISA worth £150,000.

Obviously, that's quite a bit of money. But the good news is that, even for those starting from zero, it is not an unattainable amount if investors are willing to be patient. By regularly withdrawing money from your monthly salary into an ISA, you could potentially reach this six-figure limit within a few years.

Let's say I had to put £500 to work every month. With an annual return of 8%, my portfolio will reach the £150,000 target within 14 years. Obviously, this is a long wait for meaningful income. Fortunately, there are two strategies investors can use to shorten this timeline.

Accelerate wealth building

Instead of investing £500 every month to build a £150,000 portfolio, I can give more. This is the easiest way to speed up your wealth building journey. And by increasing the annual ISA contribution limit, the timeline can be reduced to just six years.

Sadly, not everyone is lucky enough to have £1,667 to spare each month. That leaves us with a second option: increase the rate of return through stock picking.

Rather than investing in the entire FTSE 100 through an index fund, investors can choose to own individual companies directly. And if this strategy is executed wisely, the returns can be enormous. Take it A diploma (LSE:DPLM) for example.

This logistics and distribution company plays a key role in helping companies in the aerospace, biotech, and industrial industries maintain their supply chains. Therefore, it is not surprising that Diploma has outperformed the FTSE 100 over the past 10 years.

Including dividends, this stock has delivered an annualized return of 22.6%! And investing £500 at this rate of return, can translate into £150,000 in less than nine years.

Everything has its risks

Not all FTSE 100 stocks have been as successful as Diploma. In fact, there have been a number of very underperforming businesses at the same time. Some have even fallen into bankruptcy trouble. Stock pickers are more exposed to these types of risks. And even the Diploma has had its fair share of challenges over the years, including considerable competition – a threat that still exists today.

However, risk can be managed through strategies such as diversification. And by being selective and smart, investors can uncover the next stock like Diploma that sends their Shares and Shares ISA flying.