3 strategies to target passive income in an ISA

There are a few time-honoured ways to generate passive income, including through stocks. This would be via dividends paid by profitable companies, of which there are thousands worldwide.

But even with shares, there are different passive income strategies. Here are three of them that an investor may want to consider in 2026.

Income now

The first is probably the most popular, which is to buy shares to target income in the near term.

Let’s take financial services group Legal & General (LSE:LGEN) as an example. This is one of the UK’s most popular dividend stocks due to its mouth-watering 8.9% dividend yield.

In fact, this is the highest yielder in the whole FTSE 100 right now. It means that anyone investing £20,000 in Legal & General inside a Stocks and Shares ISA can expect to receive tax-free annual income of almost £1,800.

However, the yield is so high because the share price has gone nowhere for years. Perhaps this is the because the company specialises in UK life insurance and pensions, which are generally considered capital-heavy areas, particularly from a regulatory perspective.

Plodding growth is obviously another issue here, as it could threaten dividend growth (just 2% is forecast for 2025 and 2026).

Then again, Legal & General’s business model is built around steady cash generation. Earlier this week, it completed two buy-ins totalling £4.6bn with Ford’s UK pension funds. This was the largest pension risk-transfer deal announced in the UK this year. 

For investors considering an ultra-high-yield dividend stock, this one is certainly worth mulling over. A near-9% yield is hard to ignore!

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.

Compounding strategy

The second approach is a compounding one. Instead of taking dividends as cash, an investor can reinvest them automatically to buy more shares. 

Returning to Legal & General, each share is forecast to pay out 22.2p for the 2026 financial year. If that proves accurate, then someone could reinvest dividends to gain roughly an additional 760 shares. 

These would then generate even more dividends, which could be reinvested again, compounding the returns, like a snowball. 

After 15 years, the £20k ISA would be worth more than £75k!

Of course, this assumes the share price doesn’t change over this time, and that dividends regularly flow (neither of these things is guaranteed).   

However, without doubt, this reinvestment approach is clearly a very powerful one.

Growth then income

Finally, there’s a deferred income strategy. This would involve buying more growth-oriented stocks for the first however many years. These businesses will not pay big dividends (or any at all), but they may well have much stronger future earnings potential. 

The aim would be to use these stocks to (hopefully) grow a portfolio more quickly. For example, shares of AI computing giant Nvidia have surged 1,560% in the past five years, as have engine maker Rolls-Royce’s. 

Meanwhile, Facebook parent Meta Platforms is up 185% since late 2020, along with Microsoft (165%). These are hardly secret, under-the-radar shares. 

Now, I’m not saying these names are all worth buying today. Such stocks can certainly be risky if earnings growth disappoints. 

But there are many top-performing growth stocks around, showing how successful this approach can be. 

Once a portfolio has grown large enough, an investor could then switch to an income strategy, using their ISA to generate passive income. 

The post 3 strategies to target passive income in an ISA appeared first on The Motley Fool UK.

More reading

• Here’s how to start buying shares today with a spare £50 a week
• These are October’s best-selling stocks and shares among UK ISA investors
• FTSE 100 dividend shares are set to pay out nearly £80bn in 2025! Here’s how to get some
• With a yield of 9%, is this FTSE 100 dividend stock simply too good to ignore?
• 3 FTSE 100 stalwarts to consider ahead of possible ISA changes

Ben McPoland has positions in Legal & General Group Plc, Nvidia, and Rolls-Royce Plc. The Motley Fool UK has recommended Meta Platforms, Microsoft, Nvidia, and Rolls-Royce Plc. 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.

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