How I’d aim to earn £16,100 in passive income a year by investing £20k in a Stocks and Shares ISA

Harvey Jones is building a portfolio of high-yielding FTSE 100 dividend stocks that should give him a high and rising passive income for life.

| 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.

FTSE 100 stocks are a fantastic way of generating the passive income I need to fund my retirement, because they pay some of the most generous dividends in the world.

By investing in a Stocks and Shares ISA, I can take that income entirely free of tax (plus any share price growth too).

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.

Dividend income

Every adult can invest up to £20,000 in an ISA each year. If I could afford to invest the full amount in a selection of high-yielding UK dividend shares, I’d reap outsized rewards in terms of income.

I’ve spent the last year snapping up UK income stocks and now the dividends are starting to roll in. On 9 May, M&G paid £408.27 into my online trading account. Next day, Taylor Wimpey kindly sent me £158.78. 

On 21 May, Lloyds Banking Group sent £172.09, while the day after Phoenix Group Holdings paid £137.24. More will follow, as other companies do their bit.

I’m keen to buy another dividend hero and China-focused bank HSBC Holdings (LSE: HSBA) has been on my watchlist for some time.

My favourite type of dividend stock combines a high yield with a low valuation, and that’s exactly what HSBC does today. Incredibly, it trades at just 6.69 times forecast earnings, despite the share price rising 15.53% over the last year.

Even more incredibly, it’s forecast to yield 9.39% in 2024. That’s a stunning rate of income. If it comes through, that is. Dividends are never guaranteed and that is very high.

With luck it should, as HSBC makes a heap of cash. Full-year 2023 profit before tax rocketed 78% to $30.3bn as revenues boomed and higher interest rates widened margins.

This allowed the board to approve a fourth interim dividend of 31 US cents per share, lifting the full-year dividend to 61 cents, its highest since the financial crisis. It also lavished investors with share buybacks totalling $7bn and is lining up another $2bn in the first quarter.

FTSE 100 dividend star

2024 may not be such a bumper year. When interest rates start falling, margins may narrow. Plus there’s the underlying fear that HSBC could get squeezed by the US-China superpower stand-off, forcing it to pick sides. 

Every stock has risks. That’s why I invest in a spread of them. By topping up my existing dividend stock faves and adding HSBC, I reckon I could generate an average yield of around 8%. That would give me income of £1,600 in the first year, with any capital growth from rising share prices on top.

That’s only the start. With luck, that income will rise over time, as my chosen companies boost profits and hike dividends.

Let’s be super-cautious here and say I don’t generate a penny in capital growth, but simply reinvest all my dividends. After 30 years, my £20k would have grown tenfold to £201,253. With that 8% yield, I’d generate income of £16,100 a year. Which isn’t bad for an initial £20,000 investment.

If I get capital growth as well, I could get a lot more passive income than that. Fingers crossed!

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.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Harvey Jones has positions in Lloyds Banking Group Plc, M&g Plc, Phoenix Group Plc, and Taylor Wimpey Plc. The Motley Fool UK has recommended HSBC Holdings, 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.

More on Investing Articles

Young black man looking at phone while on the London Overground
Investing Articles

This 10.6% yielder beats every dividend share on the FTSE 100. Can it last?

Harvey Jones couldn't resist the double-digit yield on offer from this FTSE 100 stock. Now he'd like to get some…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

With the FTSE 100 flying, I love the look of this company

The FTSE 100 index has been in rally mode over the last few months, but I think one of it's…

Read more »

Investing Articles

17% of my Stocks and Shares ISA is invested in these 2 UK shares

Stephen Wright looks to focus on investments in companies that have strong competitive advantages. And two UK shares stand out…

Read more »

Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA into Lloyds shares

Harvey Jones bought Lloyds shares last year and is kicking himself for failing to buy even more of them. The…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Apple is still my favourite company in the S&P 500, here’s why

Apple recently unveiled a lot of new software at a developer conference. Here's why the tech giant is still my…

Read more »

Investing Articles

5 great value UK companies I’d buy in a Stocks and Shares ISA and aim to hold for decades 

Harvey Jones is getting to work on his Stocks and Shares ISA. He thinks these five firms have solid income…

Read more »

Value Shares

Are GSK shares a bargain after falling 11%?

GSK shares have taken a hit in recent weeks due to Zantac uncertainty. Here, Edward Sheldon looks at whether they’re…

Read more »

Investing Articles

Nearing £5, could the Rolls-Royce share price hit £6?

The Rolls-Royce share price has soared in the past year. Our writer thinks there could be a strong runway ahead…

Read more »