I put £20k into a Stocks and Shares ISA to target passive income

British over-18s can invest up to £20,000 in a Stocks and Shares ISA for 2022-23. Here’s how my wife and I invested this in cheap shares for bumper passive income.

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Hands up who likes paying tax unnecessarily? My wife and I certainly don’t, which is why we mostly buy shares inside legal tax shelters. Indeed, much of our portfolio is tucked away inside pensions and Stocks and Shares ISAs. This allows us to legally avoid paying tax on dividend income and on any profits from selling shares.

Opening a 2022-23 Stocks and Shares ISA

UK residents aged 18 and over can put up to £20,000 this tax year (6 April 2022 to 5 April 2023) into a Stocks and Shares ISA. My wife — who is infinitely more efficient than me — usually opens hers on the first day of each tax year. On the other hand, I’m nicknamed Last-Minute Larry for my legendary lateness in dealing with administrative matters. Some years, I’ve had to rush to London to deposit a cheque with my stockbroker on the last day of the tax year. D’oh!

We’ve just built a new ISA for income

Over the past month, my wife has invested the full £20,000 ISA allowance into a mini-portfolio of new shares. In total, she bought seven new FTSE 100 shares, two new FTSE 250 shares and one US S&P 500 stock. Each of these cheap shares was bought with one purpose in mind: to generate market-beating, tax-free dividend income for our family’s future.

Therefore, my wife filled up her ISA with shares offering some of the highest cash yields in London (and New York). I won’t list all 10 shares here, for reasons of space. But the list includes two leading UK banks, three well-known insurance companies, one mega-miner, one media firm, one property firm, one delivery firm, and America’s second-largest supermarket chain.

This new Stocks and Shares ISA has two problems

As we put this new Stocks and Shares ISA portfolio together, I warned my wife that it has two big, glaring problems. First, it’s been designed to maximise dividend income, but share dividends are not guaranteed. Hence, they can be cut or cancelled at any time.

For the record, I predict company earnings will face strong headwinds in 2022-23. I’m worried about soaring inflation and rising interest rates killing economic growth. And the war for Ukraine might help tip the UK, US and Europe into outright recession. That’s why I fully expect some FTSE 350 firms to lower their dividends over the next 12-18 months.

The second problem with this new Stocks and Shares ISA portfolio is that it’s not properly diversified. For example, it includes five financial firms, which account for half the pot’s total value. This would be too concentrated for most portfolios. Experts suggest a properly diversified portfolio should include at least 20-30 stocks. So it’s really a mini-portfolio.

Don’t panic!

The good news is that this standalone Stocks and Shares ISA portfolio is just one piece of a widely diversified jigsaw of assets. This includes our family home, large holdings in global, US and UK trackers, and a range of other investments, including cash.

In addition, this is only the first of a number of new portfolios we will create in 2022-23. These will add more diversification to our asset base, making it stronger and more resilient. And that should help us if/when financial markets melt down again!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

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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