I’m aiming to turn an empty £20k ISA into passive income of £38,313 a year

I could generate an exceptional passive income stream by investing just one year’s ISA allowance. I wouldn’t stop there though.

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I’ve been taking advantage of recent stock market volatility to snap up high-yielding FTSE 100 stocks to build a lifelong passive income for my retirement.

UK blue-chip businesses generate some of the most highest yields in the world, but particularly today.

Yields are calculated by dividing the dividend per share by the share price. So when a stock falls, the yield automatically rises. With the FTSE 100 down 500 points since topping 8,000 in February, many dividend stocks now offer irresistible levels of income.

I’d load up an empty ISA today

Cigarette maker Imperial Brands currently yields 8.04%. The decline in smoking weighs on its share price but that income easily beats inflation and looks resilient.

Paper and packaging group DS Smith has been hit by the decline in e-commerce due to the cost-of-living crisis but, as a result, yields 6.21%. Its shares are likely to recover once inflation and interest rates peak and shoppers feel better off.

Wealth manager M&G now yields 9.93% as falling markets hit assets under management. Ultra-high dividends can be fragile but this one looks sustainable, due to the group’s capital strength.

I’ve bought its shares recently, along with Legal & General Group, Lloyds Banking Group, Glencore and Taylor Wimpey, all of which combine super-high dividend yields with strong recovery prospects.

I don’t own a crystal ball and can’t say when they will recover. While I wait, I’ll reinvest all my dividends to pick up more stock at today’s low prices.

I reckon it’s possible to generate a passive income stream of almost £50,000 a year by investing just one year’s ISA allowance. As ever, there’s a catch. It will take time and it’s not guaranteed.

Since the 1980s, the FTSE 100 has delivered an average total return of 8% a year. If I invested £20k at age 25, and it grew at 8% a year, I’d have a thumping £547,333 by age 68.

These things take time

If my portfolio yielded 7% a year, which it could given my focus on high income stocks, it would generate a second income of £38,313 a year. And I wouldn’t even have to touch my capital, which hopefully would keep growing. Not a bad return from £20k, although inflation will erode its real value over time.

If I invested my £20k at age 35 instead, I could expect £253,521 by age 68, assuming the same 8% annual return. With a yield of 7%, that would still generate income of £17,747. Starting at 45, I might only end up with £117,429, or income of £8,220 a year.

While my figures are speculative, the underlying principle holds. Investing relatively small sums in high-yielding FTSE 100 shares can generate incredible returns, for those who start early and stick with it.

Naturally, I won’t just invest one year’s ISA allowance. I’d invest year after year to build the biggest possible portfolio and passive income stream. Starting early is the key. Today’s low FTSE 100 valuations and high yields are all the incentive I need to get stuck in.

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 assessed. Consider taking independent financial advice.

Harvey Jones has positions in Glencore Plc, Legal & General Group Plc, Lloyds Banking Group Plc, M&G Plc, and Taylor Wimpey Plc. The Motley Fool UK has recommended DS Smith, Imperial Brands Plc, Lloyds Banking Group Plc, and 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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