In today’s age of high prices and economic uncertainty, it can be reassuring to have a passive income stream to fall back on. And for some ISA investors who have been at it for years, it will probably be more than a trickling stream. It could be a tax-free torrent!
However, with the yearly Stocks and Shares ISA allowance at £20,000, it’s clearly going to take time for new investors to build up a significant amount of 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.
Yields
The FTSE 100 as a whole currently has a 3.4% dividend yield. This means that £20k invested in it via an index tracker would pay about £680 per year. That’s not bad, but neither is it likely to get the heart racing.
Of course, this is just the index-level yield. Many stocks pay above this, some significantly so.
Below, we can see the five highest-yielding FTSE 100 shares right now.
| Annual yield | |
|---|---|
| Legal & General | 8.3% |
| Phoenix | 8.3% |
| Taylor Wimpey | 8.1% |
| M&G | 8% |
| WPP | 7.2% |
If someone spreads £20k equally among these stocks, the yield would be around 8%. That’s more than double the index’s yield.
In terms of income, this five-stock ISA portfolio offers more like £1,600 per year rather than £680. Clearly, this is a much more attractive annual return.
Being picky
However, it’s not wise to just blindly snap up the highest-yielding dividend stocks about. Each firm needs to be considered individually, with risks and business prospects assessed. After all, dividends are never ultimately assured.
For example, advertising agency WPP (LSE: WPP) is facing challenges. The share price is down 34% in 2025, which is why the yield is so high, while the current CEO is retiring at the end of the year. We don’t know who will be taking over.
Whoever it is will have a job on their hands, as WPP has reported sluggish growth for years. Meanwhile, generative AI tools can increasingly create ad copy, designs, and even video content automatically. This may lead to a reduced need for large creative teams and agencies like WPP.
By the end of next year, Facebook and Instagram parent Meta intends to create an AI one-stop-shop that helps brands create and launch ads on its platforms. In other words, the firm is moving toward a model where advertisers hand over a product image and budget, and Meta’s AI will do the rest.
Needless to say, the potential for more advertisers to use AI tools in-house has investors increasingly worried about WPP’s competitive position. So, while the firm still generates significant revenue (£14.7bn last year) and plenty of cash, I worry about future dividend growth.
Taking the long view
Let’s assume then that an investor opts for a couple of stocks with lower yields, and that their ISA yields 6.5% instead of 8%. In this scenario, the portfolio would still throw off roughly £13,000 over the next 10 years.
In an ideal world, the companies would also hike their annual payouts, creating a rising passive income stream. If they collectively did so by 5% on average, the passive income generated would be about £16,350.
If this person were to invest a further £10,000 per year, with the same yield and dividend hikes, the cumulative passive income would be just under £50,000.
