How I’d aim to transform an empty ISA into a £30,000 income!

Here, Zaven Boyrazian explains how regular saving and investing can help transform a Stock and Shares ISA into a lucrative source of passive income.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop

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.

Using a Stocks and Shares ISA to generate an income is a powerful investing strategy. After all, ISAs protect dividends as well as capital gains from the grubby fingers of HRMC. But getting started can be quite a daunting task, especially in 2024, given the impact of the cost-of-living crisis on many Britons.

But this shouldn’t be the case. After all, despite popular belief, it doesn’t take that much capital to get the ball rolling. And by being prudent and setting aside a portion of earnings each month, it’s possible to build up a sizeable second income over time.

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.

Should you invest £1,000 in Diversified Energy Company 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 Diversified Energy Company made the list?

See the 6 stocks

Getting started

A key first step on any investing journey is to get into a disciplined savings habit. By putting aside money each month from a paycheck, investors of all financial backgrounds can gradually accumulate capital to build and expand a portfolio.

Whether it’s £50 a month or £500, when left to compound, savings can grow substantially in the long run. Therefore, missing out on even a single month of contributions can be an expensive mistake, resulting in a lot of unearned wealth.

Compounding wealth in an ISA

Historically, the UK stock market’s delivered average returns of around 8% a year. And earning this rate over the next three decades can be the key to unlocking an impressive portfolio as well as sizable investment income.

Thirty years of putting aside £50 each month equates to £18,000. But when compounded at 8%, the Stocks and Shares ISA would actually be worth just shy of £75,000 – four times more!

Similarly, setting aside £500 each month results in £180,000 of savings with a portfolio reaching £745,000. And following the 4% withdrawal rule, that can be transformed into a tax-free passive income stream of around £30,000 each year.

Index investing or stock picking?

Replicating 8% returns may be harder than it seems. It’s easy to just invest in a FTSE 100 tracker. But in recent years, the UK’s flagship index has struggled to keep up with its historical pace, averaging closer to 6%. That’s still enough to meaningfully grow wealth over time. However, for investors seeking higher returns, picking individual stocks may be the more suitable approach.

This strategy obviously comes with more risk and opens the door to greater volatility. But it also allows capital to be concentrated into specific high-quality companies rather than an entire index. In fact, this concentration is how investors can beat the market.

Take Admiral (LSE:ADM) as an example. The insurance giant has more than doubled the performance of the FTSE 100 over the last five years and continues to outpace many of its peers. By being proactive with its policy pricing, the firm has managed to remain relatively competitive, resulting in double-digit customer turnover and earnings growth.

The company has a good reputation and this must help it when potential customers not just driven by price are hunting for insurance.

Of course, buying Admiral shares doesn’t guarantee positive returns moving forward. A large chunk of the recent growth stems from issuing new motor insurance policies. And this type of insurance often has far higher claim rates that may impede profitability moving forward if customers end up in fender benders.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p 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 10%, 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

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 recommended Admiral 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.

Our best passive income stock ideas

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

More on Investing Articles

Investing Articles

At a 52-week low but forecast to rise 73%! Is this growth share the FTSE’s top recovery play? 

This FTSE 100 growth share has taken an absolute beating over the past two years but Harvey Jones says the…

Read more »

Investing Articles

This FTSE 250 share offers a juicy 9.8% yield. Will it last?

This well-known FTSE 250 share has a percentage dividend yield approaching double digits. Should Christopher Ruane add the income share…

Read more »

Investing Articles

Is a £333,000 portfolio enough to retire and live off passive income?

A third of a million pounds can generate a serious amount of passive income, but relying on this sum alone…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing For Beginners

Why FTSE 100 investors should pay attention to ‘Liberation Day’

Jon Smith explains why the upcoming tariff announcement from across the pond could have an impact on the FTSE 100,…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

Here’s why Nvidia stock fell 13% in March

The Nvidia stock price rise was looking unstoppable. Should investors now be wondering if the same might be true of…

Read more »

US Stock

It’s ISA deadline week! Here’s my 3-step game plan

Jon Smith tries to calm the hype around the last minute ISA rush to buy stocks and explains why he's…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

£10,000 invested in BAE Systems shares at Christmas is now worth…

BAE Systems shares have been surging in the FTSE 100 in 2025, driven higher by the wavering US commitment to…

Read more »

Investing Articles

Up 19% in 2 weeks, can the Tesla share price rebound further?

Tesla's first-quarter delivery numbers came out today. Will they help persuade our writer to invest his money at the current…

Read more »