£10k in an ISA? Here’s how to generate a ton of passive income

Passive income can provide a lot more financial freedom and security. Here’s an easy way to generate some within an ISA account.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Passive income’s a hot topic in the financial world right now and it’s easy to see why. When creating this form of income, it brings with it a lot more financial flexibility.

The good news is that today, there are more opportunities to create passive income than ever before. With that in mind, here’s an easy way to generate a ton of it within an ISA.

Easy income

One of the simplest ways to generate passive income today is to invest in dividend stocks. These stocks – which are available within Stocks and Shares ISAs – pay investors regular cash income out of company profits.

With these investments, creating an income stream is easy. All that’s needed is to buy one or more stocks. The investor can then kick back and let the cash (dividends) roll in.

Now, the amount of income generated will depend on the dividend yields of the stocks selected. You can think of a dividend yield like an interest rate.

However, on the London Stock Exchange today there are many decent stocks with yields of 6% and higher.

Putting together a portfolio of stocks with an average yield of 6% could potentially generate £600 in passive income a year (completely tax-free) from a £10k investment in an ISA. Constructing a portfolio with an average yield of 7% can create £700 in cash flow a year.

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.

Two things to know

What’s the catch? Well there are two. The first is that, unlike savings account interest, dividends are never guaranteed. If a company is experiencing financial difficulties it may decide to reduce or cancel its payout.

The second is that the share prices of dividend stocks can go down as well as up. So the value of an investment can fall.

Given these two issues, it’s a good idea to focus on higher-quality dividend stocks (that aren’t likely to experience significant share price weakness or cut their dividends) and not just blindly buy a bunch of high-yielders.

A dividend stock I like

One stock I like for passive income today is National Grid (LSE: NG.). A leading utilities company, it operates the electric power transmission network for Britain.

Now, the dividend yield here isn’t the highest out there. This year, the company’s expected to pay out 58.1p per share in dividends, which translates to a yield of about 5.7% at today’s share price.

But this is a company with a great long-term track record when it comes to paying dividends. Typically, the payout is increased in line with inflation.

It’s also a relatively stable stock. This is illustrated by the fact it has a ‘beta’ of 0.40, which means that for every 1% move in the UK stock market (up and down), the stock only moves 0.40%.

Of course, there are risks here. One is the fact that the company has a lot of debt on its balance sheet (most utilities companies do). This could put pressure on the stock if interest rates keep rising.

Overall though, I see it as a solid pick for passive income. If generating income was my financial goal (I prefer to invest for long-term growth), I’d definitely consider an investment in National Grid.

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.

Edward Sheldon owns shares in London Stock Exchange Group. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Dividend Shares

Investing Articles

I’d buy 11,220 Legal & General shares for £200 a month in passive income

Our writer considers how much money investors would have to put into Legal & General (LON:LGEN) shares to target £2,400…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

£5,000 in savings? Here is how I would invest in income shares

This Fool has been searching for ways to generate a passive return via income shares.

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

559 shares in this FTSE 100 dividend star can make me a £7,466 annual passive income!

This FTSE 100 gem looks undervalued to me, appears set for strong growth, and pays a big dividend yield that…

Read more »

Mature people enjoying time together during road trip
Investing Articles

Top brokers are buying these dividend stocks! I plan to snap them up while the yields are still high

The UK market is booming and dividend stocks are ripe for the picking. Our writer is considering two shares that…

Read more »

Close-up of British bank notes
Dividend Shares

If I was starting a high-yield dividend stock portfolio today, here are 3 shares I’d buy

High-yield dividend stocks can be a great way to generate income. But it can pay to be selective when building…

Read more »

Investing Articles

Here’s where I see the Legal & General share price ending 2024

After a choppy start to the year, Charlie Carman explores where the Legal & General share price could go over…

Read more »

Investing Articles

3 steps to earning £100 a month in passive income

Earning passive income from stocks is simple but not easy. Stephen Wright outlines the way to aim for £100 per…

Read more »

Black father and two young daughters dancing at home
Investing Articles

Turning a £20k ISA into a £33,000 passive income machine

A Stocks and Shares ISA can be turned into a powerful vehicle capable of throwing off attractive passive income streams…

Read more »