Turning savings into consistent passive income with a Stocks and Shares ISA doesn’t require complex financial sorcery. In fact, it can be as easy as cooking up a delicious Sunday stew.
Pick a few top-notch ingredients (stocks), mix them all into a pot (an ISA), and sit back while it slowly comes to a boil.
Over time, the compounding returns can snowball into a delightful little income stream, just like a hearty stew to feed the family. The best part: the ISA allows up to £20,000 of tax-free investments per year – so you won’t have the tax man around to dinner!
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.
How does it work?
With a moderate amount to invest, an investor could realistically aim for £750 a month in passive income. That said, it’s not a simple task of clickety-click, here comes the cash. A decent bit of time and commitment are essential ingredients to get this stew boiling.
So how much are we talking? Let’s take a look.
Yield the perfect temperature
A dividend yield is like the temperature of an old woodfire stove. It defines how much heat (dividends) is coming out, but it’s volatile and can change frequently.
We don’t want to burn this dish, so we need to find a careful balance.
Some yields go as high as 10% but are unstable — careless investors could get burnt. Other yields simmer at around 3%, which is safe — but cook up a lukewarm meal.
I try to aim for a steady average of 7%: the perfect temperature for a tasty broth that doesn’t boil over. By mixing a variety of stocks with yields between 5% and 9%, it’s possible to achieve this average.
Ok, I’m hungry now
Great, let’s make some stew! With our fire burning at 7%, we would need £130,000 worth of wood in this ISA to return £9,000 a year (£750 a month).
That’s a lot of wood! How long would that take?
Luckily, like trees, investments have a knack of growing exponentially over time. Let’s consider a portfolio with an average 7% yield and 3% annual price growth.
Chucking £300 a month into that pot could grow to £70,000 in 10 years. It wouldn’t take another 10 years to double though — in just 14.5 years, it would reach £130,000.
The right stock for the pot
Good ingredients are key to any meal and one I think is worth considering is Primary Health Properties (LSE: PHP).
The real estate investment trust (REIT) specialises in healthcare properties, a sector that’s often in high demand. As a REIT, it’s required to return 90% of profits to shareholders, making it ideal for dividends.
One concern is debt, which at £1.3bn, is more than its market cap. That puts it at risk of defaulting or diluting shareholders to cover interest payments. Neither option will treat the share price nicely.
It’s already dropped 33% in the past five years due to stubborn inflation and a muted economy. But in 2025, this dog could finally have its day — it’s already up 11% since early January!
The 7.3% yield fits my strategy and is supported by 20 years of consistent growth at a rate of 5.7%, from 1.7p per share in 2020 to 6.9p today.
In my opinion, that makes it well worth considering for an income portfolio.
