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

Passive income’s a proven path to financial freedom! Here’s how to start earning some by leveraging the power of an ISA.

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Earning a passive income continues to be one of the most popular investment objectives today. And it’s easy to understand why. After all, who doesn’t love the idea of making money while sleeping.

Best of all, it’s a goal that most investors can start achieving even with relatively small sums. This is especially true in 2024 where so many dividend stocks continue to trade at a discount. With that in mind, here’s one approach to start earning some extra income within an ISA.

Easy dividends?

Dividend growth stocks are companies that not only pay investors for simply holding stock in their portfolios but also increase these payments each year. And as home to many mature enterprises, the UK stock market’s full of them.

Should you invest £1,000 in Diageo right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Diageo made the list?

See the 6 stocks

Take Diploma (LSE:DPLM) as an example. The distribution services group has proven essential to a wide range of industries, resulting in impressive performance over the last decade. So much so that even at a price-to-earnings ratio (P/E) just shy of 50, the premium price tag doesn’t look too outrageous, providing it can maintain its momentum.

But most importantly, the firm’s underlying cash-generating capabilities have enabled it to consistently hike dividend payments for decades. That certainly sounds like a sustainable source of passive income. So with £10k in an ISA, how much money can investors make?

Calculating income

If investors were to snap up shares today, the level of income straight out of the gate would be a little lacklustre. As previously mentioned, this business is trading at a high multiple, resulting in a mediocre yield of just 1.33%. In terms of money, that’s just £133 a year off a £10k investment. And it’s almost a third of what investing in a FTSE 100 index fund can generate at the moment.

However, while the income stream today seems weak, the story looks very different 20 years from now. Over the last 15 years, Diploma has hiked dividends by an average of 14.5% each year. Assuming the firm can maintain this pace, today’s 1.33% yield could grow to 20% by 2044, or £2,000 compared to the initial £133.

That’s a 20% annual investment return from dividends alone, almost three times what the FTSE 100 usually delivers each year, including capital gains!

What about the risks?

Earning Buffett-like returns in the long run is obviously a dream. After all, earning close to 20% each year is how he became a billionaire investor, with the bulk emerging after turning 50 years old. However, it’s important to keep expectations in check.

Just because Diploma has delivered double-digit dividend growth in the past doesn’t mean it will continue to do so. The company’s closing on a £6bn market capitalisation. And while there’s plenty of room left to grow in its target markets, growth always eventually slows.

Therefore, investors may end up earning a passive income that’s smaller than expected. Nevertheless, given the potential reward, it may be a risk worth taking. And Diploma isn’t the only dividend-growth opportunity out there, opening the door to some diversification options that can help mitigate some of the investment risks.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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.

Pound coins for sale — 51 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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