Earning a passive income from investing in an ISA may seem more difficult now than it has been in previous years. After all, low interest rates are likely to remain in place throughout 2021. That means assets such as cash and bonds continue to offer low income returns.
However, the stock market crash means that many FTSE 100 and FTSE 250 shares have high dividend yields at the present time. Their low share prices and maintained dividends could hold long-term investment appeal. Therefore, even modest regular investments could be a good starting point to make a rising income over the long run.
Investing £100 a week in an ISA to make a passive income
At the present time, the FTSE 100 offers a generous passive income. The index currently yields nearly 5%. That’s because it’s trading significantly lower than its record high following the 2020 stock market crash. Moreover, many of its members offer even higher dividend yields than the index at the present time. As such, an ISA investor could realistically build a portfolio of FTSE 100 shares that together have a combined yield in excess of the index’s 5%.
Furthermore, it may be possible to obtain a relatively resilient income return from FTSE 100 and FTSE 250 shares. For example, investors may wish to consider a company’s financial position before they purchase. Businesses with low debt levels and substantial interest cover may be better able to cope with a period of weaker sales. Similarly, stocks with dividend cover in excess of one (where net profit covers dividends more than once) may offer a more robust passive income in 2021 and beyond.
Obtaining a rising income return in the long run
Of course, a £100 weekly ISA investment is unlikely to return a passive income large enough to provide financial freedom in 2021. However, the prospect of an improving economic outlook means that dividend growth rates in 2021 and beyond could strengthen significantly versus their current rates.
After all, the world economy has always recovered from its downturns to post strong GDP growth over the long run. As a result, ISA investors may be able to enjoy a high yield today that grows at a fast pace over the coming years.
As such, investing in companies that not only have high and affordable yields, but also offer dividend growth potential in future, could be a shrewd move. They may include stocks that are likely to benefit from long-term growth trends within their industry. Or maybe those companies with wide economic moats that can lead to rising profitability over the long run. They may be able to afford fast-rising dividend payouts in the coming years. And that could transform a modest regular ISA investment in 2021 into a surprisingly large passive income in the long run.
