A Stocks and Shares ISA can be a useful platform for building passive income streams over both the short and long term.
If I wanted to focus a £20k ISA on generating passive income, starting as soon as this year, here is how I would go about it.
Getting an ISA ready to invest
My first move, of course, would be to choose a Stocks and Shares ISA then put the £20k into it, ready to invest.
If I did not want passive income now, I could compound the dividends and hopefully earn more over the long run.
But, in this example, I foresee taking the dividends out as I earn them, to target yearly income of £1,380.
Doing the maths
That amount equates to a 6.9% average yield from my ISA. With £20k, I would diversify by spreading my investment across five to 10 different shares.
As an average, that means not every share I own needs to yield 6.9%. Some might offer significantly less, as long as my average still came in at 6.9%.
At the moment, the average FTSE 100 yield is 3.6%. So my goal is a considerable bit above that.
But I think it is achievable in today’s market. There are a number of sectors, from tobacco to financial services, with good quality companies currently yielding 6%, 7%, or even more.
Making my stock market shopping list
As an example, consider Man Group (LSE: EMG) with its 6.4% yield.
The FTSE 250 company trades on a price-to-earnings ratio of 13, which I think is fair. It has been consistently profitable in recent years. Last year, for example, after profits after tax fell by 61%, they still came in at $234m.
Does that fall reflect a company with deep-rooted problems? I do not see it that way. Rather, I think it is indicative of the sorts of swings in earnings often seen in investment management firms like Man.
The company had around $175bn of assets under management at the end of September. It has a well-established customer base and a strong reputation, having been in business for more than two centuries already.
One risk I see is choppy markets leading to investors withdrawing funds, hurting profits. Assets under management fell in the most recent quarter, not something I would like to see repeated if I owned the share. This year the interim dividend has been maintained at its previous level.
Building an income machine
I think Man is a share investors should consider as they look for income sources.
By using an ISA to buy shares in a number of impressive businesses in a range of economic sectors, I think I could realistically target £1,380 in passive income in 2025 and annually.
No dividend is ever guaranteed to last, though, so I would take time to find exactly the sort of income shares I wanted.
The post How I’d invest my £20K ISA allowance to target £1,380 of passive income annually appeared first on The Motley Fool UK.
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
