With the right strategy, UK investors can leverage the power of an ISA to unlock £10k of passive income. We’re just over halfway through the tax year. But there’s still plenty of time to make the most of the annual ISA allowance and reap tax-free capital gains and dividends.
These tax advantages are why a Stocks and Shares ISA’s such a powerful wealth-building tool. So with that in mind, let’s explore how to nail passive income generation in the stock market right now.
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.
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Working backwards
If a £ 10,000 second income stream’s my target, how much money do I need to invest to start earning this?
Let’s start with a FTSE 100 index tracker fund. Right now, the UK’s flagship index offers a dividend yield of 3.5%. So if I were to invest all my capital into a low-cost FTSE 100 fund, I’d need to have around £285,000.
Needless to say, that’s not pocket change. And even if someone were fortunate enough to have that sort of cash lying around, it would take just over 14 years to deposit this capital into an ISA due to the maximum £20,000 annual allowance.
Fortunately, stock picking offers a solution. Instead of simply mimicking the market average, investors can be more selective. This does require additional work and exposes a portfolio to more risk. But it also opens the door to achieving a far more impressive yield. And looking across the FTSE 100 there are several stocks offering closer to 6% yields.
At this level of payout, an investor would only need to have around £167,000 of capital. It’s still a significant chunk of change, but it would only take eight years to max out an ISA. Yet even those without exorbitant amounts of cash lying around can still hit this target with just £500 a month.
Being smart with investments
Let’s take a look at Land Securities Group (LSE:LAND). The commercial landlord saw its share price tank in the wake of the pandemic as lockdowns saw huge chunks of its rental income evaporate. And even today, the stock’s yet to recover.
But it’s worth considering. With higher interest rates and the rise of hybrid working, this business continues to face headwinds. That hardly sounds like an ideal investment. But with most investors writing this business off, a potential buying opportunity may have emerged. Now that interest rates are finally dropping, the firm could be well-positioned to make a comeback next year.
There are obviously no guarantees here. But let’s assume the firm continues to maintain its 6% yield and delivers an extra 4% in capital gains in line with the overall stock market. Investing £500 a month at this rate could build a £167,000 portfolio with a £10,000 passive income within just under 14 years when starting from zero.
Obviously, LandSec’s not the only 6%-yielding opportunity out there right now. And there are other opportunities beyond the FTSE 100 offering similar yields at lower risks. Therefore, investors may have little trouble building a well-balanced, diversified, and lucrative portfolio after doing a bit of research.
