Stocks and Shares ISAs are superb vehicles for passive income investing. With a £20,000 yearly contribution limit and no taxes due on dividends, savvy investors can buy shares in an ISA to shield their portfolios from HMRC.
Whether the ultimate goal is early retirement or greater financial flexibility, here’s one way investors could aim for £2,500 in monthly passive income.
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.
Income investing
Buying dividend stocks isn’t a guaranteed method to make money. Company share prices frequently fall and sometimes stay depressed for many years. Additionally, dividend payments aren’t assured, so they’re not a sure-fire passive income source.
However, there’s also potential for big rewards. Thanks to compound returns, portfolio gains can add up considerably over the long run, especially in a tax-free ISA.
For instance, if the average dividend yield across an investor’s holdings is 5%, they’d need £600,000 invested to secure £30,000 in annual passive income.
Assuming their portfolio grew 10% per year, this could be accomplished in under 18 years by investing £1,000 a month. Someone starting at 32 could feasibly be earning £2,500 in monthly passive income by their 50th birthday. Encouraging stuff!
To achieve a 5% yield, it’s worth diversifying across a few dozen stocks to mitigate the impact of possible dividend cuts or suspensions. Let’s examine two that deserve consideration.
Halma
First, investors could consider taking refuge in Halma (LSE:HLMA) shares. This FTSE 100-listed safety equipment specialist has a stunning dividend history. For 45 consecutive years, payouts have increased by at least 5%.
Halma’s business isn’t sexy, but that has advantages. It produces fire detection systems, medical devices, safety locks, water treatment solutions, and much more. Since many of Halma’s products are mandated by law, the group benefits from non-discretionary demand, making it resilient to economic downturns.
However, the valuation’s a potential concern. Trading at a forward price-to-earnings (P/E) ratio above 27, this stock isn’t cheap. Disappointing results could send the share price tumbling.
Thankfully, that hasn’t materialised recently. Halma’s turned record profits every year for over two decades. Upgraded FY25 guidance for profit margins “modestly above” 21% suggests the conglomerate will continue in that vein for the near future.
Despite consistent dividend growth, the yield’s just 0.8%. Consequently, higher-yield shares would be needed to complement a position in Halma.
ITV
One that might fit the bill is FTSE 250 media company ITV (LSE:ITV), which yields an attractive 6.6%.
Although the broadcasting firm’s total revenue for FY24 dipped 3% to £4.1bn, pre-tax profits surged from £193m to £521m. Record profits for its production arm, ITV studios, and higher digital advertising revenues underpinned this bottom-line improvement.
ITV has been shifting its focus from traditional television advertising to the digital streaming market dominated by platforms like Netflix. It’s encouraging to see efforts in this space bearing fruit.
Furthermore, takeover rumours linked to multiple potential bidders have boosted share price growth in recent months. Should an acquisition happen, this could be a boon for shareholders.
As a note of caution, dividend cover of 1.8 times expected earnings is below the two times safety threshold, indicating it might be unsustainable. Therefore, investors would be wise to avoid an overreliance on ITV shares for passive income, but they’re worth considering as part of a diversified portfolio.
