I’d buy this passive income stock for my ISA that pays out £4.20 per share

Jon Smith explains why he likes a FTSE 250 stock for passive income that has an attractive dividend forecast on top of the current above-average yield.

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The deadline for the Stocks and Shares ISA year is 5 April. With that in mind, I can put any spare cash to use in the ISA before the £20k allowance resets. Of course, I don’t want to simply buy anything. Yet there’s a good stock I’ve found for passive income that could be a smart play. After all, any dividends I receive within the ISA aren’t taxed, meaning I get to keep more of the proceeds for myself.

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.

Let’s do battle

I’m talking about Games Workshop (LSE:GAW). The British manufacturer of miniature wargames might have some people rolling their eyes, but the numbers don’t lie. With a market cap of £3.28bn, it’s a proper company that has a strong track record.

The stock is up 7% over the past year, as it continues to push ahead with making use of key intellectual property (IP). Independent retailers are growing and recording strong sales traffic. Further, investment in a new online store and back office systems should enable further revenue increases going forward.

The January half-year report showed that revenue grew from £212.3m a year to £235.6m now. This helped filter down to a strong profit and earnings per share of 216.9p. The dividend was declared, and given that it pays out income regularly, it enables me to tally up the payments from the past year. This totals 420p.

Talking through the income

Let’s delve into the dividends in more details. Using the current share price of 9,860p, the 420p dividend provides a current dividend yield of 4.26%. This is higher than the FTSE 250 average of 3.41%.

It’s true that with the share price at that level, I’m going to have to spend the best part of £100 to buy one share. So this income idea doesn’t work if I only have a small amount to invest. Even if I have £100, when I add in the transaction costs, it heavily eats into my return.

Therefore, I’d want to be investing a minimum of £300 to make this worthwhile in my view. Yet the benefits going forward could be juicy. The forecasted dividend payments for next year total 470p. So if I assume the share price stays the same, this would pull the yield even higher to 4.76%.

Given that my ISA is a place for long-term holdings, I think it makes sense to include Games Workshop in this part of my portfolio.

Balanced risks

Every company has risks associated with it. For Games Workshop, it flagged up that further investment is needed with IT systems in order to keep pace with the growth of the business. If this falls behind then it could hamper the firm.

Further, there are some questions regarding how much more the firm can grow. After all, it’s a niche business that has a limited target market size.

Even with those thoughts, I still think it’s a great stock for me to include before the ISA deadline. I’m going to see what free cash I have and go from there.

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.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Games Workshop Group 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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