I reckon it’s possible to generate a bumper passive income of £9,913 a year by investing £20k in a Stocks and Shares ISA.
That seems a tall order and I won’t get anywhere that much in year one. No stock on earth yields 49.56% a year, and if it did, I wouldn’t touch it.
Today, the FTSE 100 index has an average yield of around 3.5%, which would give me income of around £700 annually in year one. That’s a long way from £9,913. So how do I go from here to there?
I’d start by investing in Aviva
I’d start by targeting shares at the higher end of the yield spectrum. Insure Aviva (LSE: AV) has a trailing yield of 6.83% a year. If I put my full £20k ISA into that, I’d get income of £1,366 in year one. That’s still nowhere near £9,913 though. So what’s my secret weapon?
Aviva has a nicely balanced business covering pensions, insurance, investments, equity release and other financial services products. Business is booming. Aviva recently posted a 58% increase in first-half statutory profits to £654m. Operating profits climbed 14% to £875m. It also hiked its interim dividend 7% to 11.9p.
It’s not without risks. Like every company, Aviva will have good years and bad years. If it underperforms at any point, disappointed investors may drift away, hitting the share price.
Dividends aren’t guaranteed either. Companies have to generate enough profits to fund them, year after year. Like many, Aviva dropped its dividend during the pandemic, but it’s been climbing steadily since, as this chart shows.
Chart by TradingView
Because of risks like these, I’d never invest my full £20k ISA in just one stock. I’d looked to split it between four or five different companies for diversification. But my example shows just what can be done, by buying shares and holding them for the long run.
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I aim to hold my stock picks for a minimum five years, and ideally decades. Let’s say I held Aviva for 30 years and it maintained today’s 6.83% yield throughout. At the end, I’d have £104,318 purely from reinvested dividends. A 6.83% yield on that sum would give me income of £9,913 a year.
Of course, this is theoretical. Aviva’s unlikely to maintain such a high yield for so long. On the other hand, my calculations don’t include any share price growth whatsoever. So I could end up with a lot more than £104,318. In the last year, the Aviva share price is up an impressive 20%.
What my calculations do show is how it’s possible to get a high income from a relatively small original stake. And that secret weapon I mentioned? Time.
Also, I wouldn’t just invest this year’s ISA allowance. I’d keep investing year after year, spreading my risk across 20 stocks or so in total. That way, I’d hope to generating a lot more income than £9,913 a year. And all of it tax free.
