How I’d invest £20k in a Stocks and Shares ISA to get passive income for life

Zaven Boyrazian breaks down how to capitalise on the Stocks and Shares ISA annual allowance to start earning lifelong dividend income.

| 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.

Despite currently being limited to £20,000, the annual Stocks and Shares ISA allowance is not something investors want to miss out on. After all, it enables a portfolio to grow unimpeded by capital gains or dividend taxes. And in the long run, that can make an enormous difference to an investor’s wealth and potential investment income.

So with that in mind, let’s explore how investors can leverage this powerful tool to secure a lifelong passive income stream.

Making the most of an ISA

Because the annual allowance doesn’t roll over, any amount that goes unused is lost forever. Therefore, it makes sense for investors to try and capitalise on it as much as possible. However, in some instances, that may be unwise.

Investing’s a long-term game. And when putting money into a portfolio, investors should behave as if that money has been locked away for at least three to five years. Why? Because should another stock market crash or correction rear its ugly head, a portfolio is likely to take quite a tumble, even when invested in top-notch stocks. And one of the worst situations an investor can find themselves in is being forced to sell a terrific business at a terrible price to pay the bills.

In other words, while it’s important to try and maximise the £20,000 ISA limit each year, investors must stick to the golden rule of never investing money that they’ll need in the near term.

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.

Generating a passive income

Earning a steady stream of cash flow from a stock portfolio’s fairly straightforward. One method is to slowly sell some shares in a position to earn an income stream each month. A more popular approach is to invest in dividend-paying companies.

Businesses that don’t have any major growth opportunities often end up redistributing excess earnings back to shareholders in the form of a dividend payment. While it can vary, these stocks usually pay out every quarter, giving income investors a fairly predictable income stream.

However, like most things with investing, dividends aren’t guaranteed. Let’s take a look at Carnival (LSE:CCL) as an example. Prior to the pandemic, the cruise ship operator was a favourite among income funds and portfolios. The consistent demand for cruise-style holidays enabled management to raise dividends regularly and, with it, the dividend yield.

In 2019, this trend seemed like it would go on for decades to come, especially as the firm operated in an industry with enormous barriers to entry, fending off any young disruptor threats. But then the pandemic came along and changed the game. With the global travel industry brought to its knees, Carnival went from industry stalwart to near bankruptcy. And even now, four years later, the dividends haven’t resumed.

Diversification is paramount

The assassination of Carnival’s dividend was a surprise to many. After all, it wasn’t caused by an internal problem but rather an unforeseen external threat. And while it may not be another pandemic, there will undoubtedly be other industry catastrophes in the future.

Predicting such events is likely going to be quite the challenge. Fortunately, there’s a far easier solution – diversification. By spreading an investment portfolio across many top-notch dividend-paying stocks operating in different sectors and geographies, the overall impact of one failing can be mitigated by the continued success of the other positions within a portfolio.

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.

Zaven Boyrazian has no position in any of the shares mentioned. 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 Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

3 UK stocks I reckon could benefit from the upcoming general election

As the general election hurtles towards us, this Fool wonders which UK stocks could benefit, and focuses on three picks…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

At 11%, this dividend share pays the biggest yield in the FTSE 100

When a dividend share offers a big yield, we need to be cautious of the risks. But I reckon this…

Read more »

British Isles on nautical map
Investing Articles

I reckon Hiscox shares could be one of the best bargains on the FTSE

I've been investing in FTSE companies for years, but after a major decline I've not seen a company with as…

Read more »

Grey Number 4 Stencil on Yellow Concrete Wall
Investing Articles

4 reasons I’d still buy National Grid shares in a heartbeat despite the recent wobble!

As National Grid shares plunged on the news of a right issue, I’m not flinching, and reckon it's a top…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

After gaining 45% in 12 months, is the Amazon share price now overvalued?

Our author thinks the Amazon share price might be too high. While the long-term future of the business looks bright,…

Read more »

Investing Articles

2 hot dividend stocks I’d buy and hold for 10 years

Our writer reckons these two dividend stocks could help her bag juicy dividends for years to come and explains why.

Read more »

British Pennies on a Pound Note
Investing Articles

2 dividend-paying penny shares I’d happily own

These two penny shares have caught our writer's eye for a combination of income prospects now and business growth potential…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

This FTSE 250 share looks like a bargain to me!

This FTSE 250 share has seen its price tumble due to chaotic local economic conditions in a key market. But…

Read more »