With a £100,000 investment ISA, investors can potentially generate a lot of passive income. Today, there are many different types of income investments available and the yields on offer can be attractive.
Sitting on £100k and looking for income ideas? Here are three to consider.
Gilts
Gilts are UK government bonds. When you buy one, you’re essentially lending the government money in return for interest.
With these investments, the investor typically receives ‘coupon’ payments twice a year. Interest rates will vary depending on when the gilt was issued and the time to maturity but there are some attractive rates available in the market today (4.5%+).
Returns also come from the return of the loan at maturity. For example, if someone buys a gilt for £99, they’ll make a profit of £1 when it matures because gilts have a ‘face value’ of £100.
One big advantage of gilts is that they are relatively safe investments (assuming that the UK government is not going to default on its debt). They can also be very tax-efficient.
On the downside, with conventional gilts, coupons are fixed. Therefore, there’s little protection from inflation.
Dividend Heroes
One type of income investment that can potentially solve the inflation issue is a Dividend Hero. These are investment trusts that have increased their annual income distributions for 20 years or more.
An example here – which could be worth considering – is the Merchants Trust (LSE: MRCH). This invests predominantly in high-yield UK shares and has registered 43 consecutive annual dividend increases now meaning that it has provided investors with inflation protection for decades.
Looking beyond the brilliant long-term income track record here, there are a few things I like about this trust. One is that it has a yield in excess of 5% (at the moment).
Another thing I like is that it trades at a 7% discount to the value of its assets. In other words, investors are getting access to a basket of UK shares at a significant discount.
An advantage of investment trusts like Merchants is that they generally invest a range of different dividend stocks so they can provide investors with diversification. For example, this trust currently holds about 50 different stocks.
They don’t always beat the broader market though. This is a risk to be aware of with this kind of investment.
Individual dividend stocks
Finally, individual dividend stocks can be a great way to generate passive income. On the London Stock Exchange today, there are many stocks with yields in excess of 6%.
One example here is savings and investment company M&G. It currently sports a yield of about 8.3%.
Another example is insurance company Admiral. It’s offering a yield of about 6.3% at present.
These kinds of stocks are not without their risks. However, sized properly in a portfolio, they can be a good way to boost income.
Building an income portfolio
It’s worth pointing out that these three types of passive income investments are not mutually exclusive. In other words, they can all be included in a Stocks and Shares ISA.
I think combining different types of investments is the best strategy. With this approach, someone could potentially generate £5,000 to £7,000 in income a year from a £100k portfolio while simultaneously minimising investment risk.
