How much passive income could a £20,000 ISA provide in a year?
The London Stock Exchange — and more specifically, the FTSE 100 — is a popular place for investors to hunt for passive income. The UK is famed for its culture of paying large and consistent dividends. And the Footsie is packed with shares whose strong balance sheets, market leading positions, and diversified revenue streams provide companies the firepower to deliver decent dividends over time.
Yet the exact amount of dividend income an investor makes can vary significantly from stock to stock. And with hundreds of dividend-paying stocks to choose from, the amount one individual makes could look very different to someone else’s.
Still with a £20,000 Stocks and Shares ISA allowance, I’m confident that investors can make a tasty four-figure dividend income each year.
Diversifying for success
As I say, the dividends paid by UK shares are impressive by global standards. But shareholder payouts are never, ever guaranteed, and past performance isn’t always a reliable guide to future returns.
Take Shell, for instance, which hadn’t cut annual dividends since World War II until the global pandemic came along in 2020. Looking ahead, speculation is mounting that Diageo‘s about to cut dividends as weak sales and the impact of US tariffs weigh. Payouts here have risen at reported currencies every year since the late 1990s.
ISA investors can, however, substantially reduce (if not totally eliminate) the risk of such events on their income through diversification. Owning a basket of dividend-paying stocks can substantially limit the impact on an individual’s total passive income.
A FTSE 100 portfolio
Here’s a portfolio of 10 separate dividend stocks that could deliver a large and reliable income over time.
With high dividend yields averaging 5.8% — above the FTSE 100 average of 3.4% — they could provide a second income of £1,160 over the next 12 months alone, based on a £20,000 ISA investment spread equally among them.
| Dividend share | Sector | Forward dividend yield |
|---|---|---|
| Legal & General | Financial services | 8.6% |
| Severn Trent | Utilities | 4.6% |
| Aviva (LSE:AV.) | Financial services | 6.2% |
| Mondi | Manufacturing | 5.1% |
| Unite | Real estate investment trust (REIT) | 4.5% |
| HSBC | Banking | 5.7% |
| Rio Tinto | Mining | 6.4% |
| Vodafone | Telecommunications | 5.5% |
| WPP | Media | 7% |
| GSK | Pharmaceuticals | 4.5% |
As I say, this portfolio (like any) doesn’t come without peril. Both Vodafone and Rio Tinto have cut dividends in recent times in response to tough trading conditions and/or balance sheet worries.
But this collection of quality FTSE 100 shares combines high yields with diversification across sectors, reducing risk while maintaining strong overall income potential. I hold four of these dividend shares in my own portfolio.
Aviva is actually my fifth largest single holding today. Following heavy restructuring, it has substantial balance sheet strength it can use to pay large dividends and invest for growth. As of December, its Solvency II capital ratio was 201%.
With its robust financial foundations, it can continue building and acquiring capital-light businesses to grow long-term earnings (and by extension) dividends. Its planned £3.7m acquisition of Direct Line is a prime example of how it’s using its cash reserves to good effect.
Dividends could come under threat when economic downturns dampen financial services spending. But over a longer horizon, I think it will remain a top-paying dividend stock.
The post How much passive income could a £20,000 ISA provide in a year? appeared first on The Motley Fool UK.
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HSBC Holdings is an advertising partner of Motley Fool Money. Royston Wild has positions in Aviva Plc, Diageo Plc, HSBC Holdings, Legal & General Group Plc, and Rio Tinto Group. The Motley Fool UK has recommended Diageo Plc, GSK, HSBC Holdings, and Vodafone Group Public. 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.
