£20k in a Stocks & Shares ISA? That could lead to a £13k passive income

The FTSE 100 has rocketed in value, yet Stocks and Shares ISA investors still have loads of excellent income opportunities. Around half a dozen Footsie shares like Legal & General (LSE:LGEN), M&G and Phoenix Group offer dividend yields of 6% and above.

By drawing back and looking across the whole London stock market, the number increases to above 100.

Not all of these will be rock-solid dividend contenders. The yields on many stocks have leapt as their share prices have plummeted, reflecting in some cases serious operational or balance sheet problems. But among that grouping there are genuine long-term passive income opportunities.

Have £20,000 in an ISA to invest today? Here’s how you could target a strong and sustainable second income.

ISA benefits

The Stocks and Shares ISA is (in my view) head and shoulders above any other form of investment account. That’s not just in the UK. From a global perspective it’s also unmatched.

Investors don’t pay a single penny to the taxman in capital gains or on any dividends they receive. By keeping 100% of their returns, they have more money to invest and let compound over time.

Now, £20k is a decent chunk of cash to achieve a large passive income and portfolio growth over time.

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.

Life-changing wealth

Based on 6%-yielding dividend shares like I’ve described, a £20,000 ISA today would deliver a £1,200 passive income over a year.

That’s a decent sum of money. But it’s hardly a life-changing one. Want to know how you could target the latter?

It’s simple: building a diversified portfolio across a broad range of income stocks. Dividends are never guaranteed, but history shows that a balanced mix of shares spanning sectors and regions reduces risk and can deliver a smooth return over time.

A Stocks and Shares ISA that grew 4% a year on average, and delivered a 6% dividend yield that was reinvested, would turn into £217,000 after 25 years.

A 6% yield on a portfolio this size would then generate a £13,000 passive income! Those who could invest more along the way could, of course, make even more, based on the same rates of return.

Looking for high yields?

I think investors looking for brilliant dividend yields should give Legal & General shares a serious look. For me, it’s the best FTSE 100 passive income stock money can buy.

It’s not just the fact that the firm has the index’s biggest forward yield (8.5%). Dividends have risen in 14 of the past 15 years, helping investors build a growing stream of income.

But what makes it such a reliable dividend star? Its businesses require limited capital to operate, leaving plenty of excess cash on its books. And with limited growth opportunities, Legal & General prioritises distributing this capital to shareholders over reinvesting in its operations.

With a Solvency II capital ratio of 217%, I’m expecting Legal & General’s proud dividend record to remain intact. That said, tough economic conditions persist and near-term earnings could come under pressure.

Dividends on Legal & General shares are expected to rise again in 2027, driving the yield to 8.7%. I think the company’s a brilliant stock to consider for any Stocks and Shares ISA investor.

The post £20k in a Stocks & Shares ISA? That could lead to a £13k passive income appeared first on The Motley Fool UK.

More reading

• Anyone can claim a share of this £86bn of passive income!
• A once-in-a-decade chance to grab this brilliant 8%-yielding dividend share?
• 3 dividend stocks with the biggest FTSE 100 yields. Should I buy?
• I asked ChatGPT if it’s best to buy UK dividend shares in an ISA or SIPP and it said… 
• If a 55-year-old puts £1,000 a month into a SIPP, here’s what they could have by retirement

Royston Wild has positions in Legal & General Group Plc. The Motley Fool UK has recommended M&g 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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