How I’d fill an empty ISA to build a £1,051 monthly passive income machine

Jon Smith explains how he could build an ISA around top dividend options to achieve a yield in excess of 6% for his passive income stream.

| 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.

My Stocks and Shares ISA is a great tool to allow me to take advantage of favourable tax treatment when investing. I’ve had an ISA for years, but if I was starting over with an empty one and trying to build up my passive income stream, here’s what I’d do and where I’d look to allocate my money.

My strategy

If I’m going to be focused purely on income generation, the bulk of the stocks I’d look to buy would be dividend shares. This refers to companies that pay out dividends on a regular basis, which provides me with cash which I can then either bank or reinvest to buy more stock.

I’d put 75% of my money in dividend shares. The other 25% I’d invest in growth stocks. These probably won’t pay me any income. However, they have the potential to offer me high share price appreciation in the coming years. For example, let’s say I invested £1,000 in a stock, with average share price gains of 10% a year. After the first year, I could trim my holdings in the company by £100 and still retain my original £1,000 investment. This can act as a source of income.

The main risk with dividend shares is that the income isn’t guaranteed. If a firm has a bad year, it might cut the payment. For growth stocks, the share price might fall instead of rally. This would mean I can’t pull any money out for that period of time.

Building the portfolio

One example of a stock that I’d include is Investec (LSE:INVP). I don’t currently own the stock, but am seriously thinking of buying it.

The current dividend yield is 5.85%, well above the FTSE 250 average. Over the past year, the share price is up 32%. So this could actually act as being a perfect mix of a dividend and growth stock!

The bank has performed well over the past year. Last month, it provided a trading update, which highlighted the “more positive economic outlook”. It expects adjusted operating profit to be between £520m and £550m for H2, in contrast with the £487.7m from H1. With adjusted earnings per share also projected to keep rising, I don’t see the current dividend under any threat.

Investec has a blend of operating divisions, ranging from wealth management to corporate banking. It has diversified geographic exposure, from South Africa to the UK. This should allow it to smooth out any individual problems in a specific area.

One risk is that the recent merger with Rathbones Group could act as a drag overall. Soundbites from past months indicate that the progress is very time-consuming.

The income potential

Each year, I can invest up to £20k of my money in the ISA and y gains are all tax-free. If I assume that I can afford to invest £1k a month in a portfolio that yields me 6.5% a year, my income potential could rise quickly.

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.

If I kept this up for 11 years, my pot could be worth £194,085. In the following year, this could then yield me £1,051 per month on average.

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.

Jon Smith 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 Dividend Shares

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£9,000 of savings? Here’s my 3-step approach to aim for £1,794 in passive income

Christopher Ruane walks through the practical steps he would take to try and turn £9,000 into a sizeable passive income…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d buy 29,412 shares of this UK dividend stock for £150 a month in passive income

Insiders have been buying this dividend stock, which offers an 8.5% yield. Roland Head explains why he’d choose the shares…

Read more »

Investing Articles

With a 6.6% yield, is now the right time to add this income stock to my ISA?

Our writer’s looking to boost his Stocks and Shares ISA. With this in mind, he’s debating whether to buy a…

Read more »

Dividend Shares

This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped…

Read more »

Investing Articles

With yields over 8.8%, which of the FTSE 100’s top 5 passive income stocks do I think is the best?

These five passive income stocks are all yielding more than 8.8%. Our writer considers which of them (if any) would…

Read more »

Dividend Shares

Here’s a simple 5-stock dividend income portfolio with a 7.5% yield

With these five British dividend stocks, one could potentially generate income of around £750 per year from a £10,000 investment.

Read more »

Investing Articles

If I’d put £10,000 into the FTSE 100’s biggest stock at the start of 2024, here’s what I’d have now

The FTSE 100’s biggest company has romped away from the index over the last five years, but has fallen behind…

Read more »

Investing Articles

How I’d use £10 a day to build a lifetime of passive income

Zaven Boyrazian explains his three-step plan to help generate a passive income in 2024 by putting aside just £10 a…

Read more »