Building a steady passive income from stocks might sound like something reserved for the financial elite. But after years of consistent investing, I’ve found that even average investors can put together a decent second income stream.
I’ve always liked the simplicity and tax advantages of a Stocks and Shares ISA. And for those who can afford to invest up to the full £20,000 annual limit, the numbers over several years become genuinely exciting.
Tax-free compounding
Dividends and capital gains earned inside the wrapper are untouched by the taxman. That means more money left in the pot to reinvest, while the magic of compounding works its wonders.
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.
It doesn’t take a genius stock picker to get good results. A well-diversified portfolio of reliable dividend payers, regularly topped up, can deliver significant results over time.
I focus on quality income shares, plucked mostly from the FTSE 100, and reinvest the dividends. That way, my portfolio keeps building without me needing to do much, the very definition of passive investing.
OSB Group has a high yield
There are top dividend stocks on the FTSE 250 too.
One company I think deserves attention is OSB Group (LSE: OSB), a specialist lender focused on areas like buy-to-let, commercial property and development finance. It’s not a household name, but it’s been delivering strong results under the radar. Over the past year, the share price has risen 17%. Over five years, it’s up by an impressive 105%.
The latest update on 30 April showed continued lending growth, with £1.1bn in new loans written in the first quarter, up from £1bn a year ago. The loan book climbed 3.9% to £25.2bn with retail deposits stable at £23.8bn.
Credit quality looks steady, with arrears holding at 1.7%. CEO Andy Golding, has expressed confidence in meeting full-year guidance, aiming for stable margins and attractive shareholder returns. That’s been supported by a £100m share buyback, with £15.7m of shares repurchased so far.
OSB’s dividend yield is currently around 7%. That’s, a fantastic rate of income, if it holds up. The price-to-earnings ratio sits at just 5.8, which to me looks like great value, although clearly, the market is cautious.
Long-term investing
There are risks. It has been a tough few years for commercial property and buy-to-let, which may explains the low valuation. We’re not out of the woods yet. While OSB won’t feel a direct pinch from US tariffs, broader economic jitters may still impact the UK property market.
Falling interest rates should help, but may also squeeze the gap between what OSB charges borrowers and pays savers, known as net interest margins.
As ever, investors shouldn’t put all their faith in just one stock, but build a diversified spread to ease risk.
Now, let’s say someone managed to max out their £20,000 Stocks and Shares ISA this year, and every year for the next two decades. It’s a big commitment, and there’s always the chance the allowance could change.
But assuming a return of 6.9% a year, in line with the FTSE 100’s long-term average, the pot would grow to roughly £877,303.
If the portfolio yields 6% on average our investor could generate around £52,638 in annual income, all while keeping their capital invested and working.
It’s not guaranteed, but it shows how much passive income can be generated with discipline, patience and a long-term plan.
