Trick or treat? The stock market contains both – and like most investors, I am hoping for treats. That is not just blind hope though. Rather, I invest my ISA in such a way that it will hopefully help me generate passive income streams over the years and indeed decades to come.
Over time, an ISA can potentially generate a sizeable amount of passive income.
In this example, I will illustrate how £20k invested today could hopefully produce £1,600 of passive income by this time next year.
Earning money from an ISA
There are several ways in which someone can aim to build wealth from a Stocks and Shares ISA. One is by shares they own going up in value.
Take Airtel Africa as an example. Its share price has leapt 172% over the past year. So someone who had invested £1,000 a year ago ought now to be sitting on a holding worth over £2,700.
Another way of building wealth is through dividends. These are never guaranteed, but they can be lucrative.
ITV, for example, has a dividend yield of 7.2%. So if the payout per share is maintained, someone investing £1,000 today will hopefully earn £72 of dividends over the coming year.
If they hang onto the shares they could potentially be earning dividends from ITV for a lot longer. Holding them in an ISA could also offer them tax advantages when it comes to reinvesting those dividends.
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.
But there are a couple of things that can destroy value in an ISA too. One is falling share prices. ITV shares are 6% lower than a year ago. But until an investor sells, a paper loss is just that. They can choose to hang onto their shares in the hope the price will recover.
Another value destroyer is costs and fees from the ISA provider. So a savvy investor will carefully select the right Stocks and Shares ISA for them.
Building wealth through dividends
My example of earning £1,600 from an ISA spread over multiple shares in the coming year is based only on dividends though, and excludes move in share prices.
That would require a yield of 8%. That is more than double the current FTSE 100 yield. But I think it is possible. There are FTSE 100 and FSTE 250 shares with yields of 8% or higher, as well as quite a few investment trusts.
A FTSE 100 share with growing dividends
One share I think investors should consider is FTSE 100 insurer Phoenix Group (LSE: PHNX), with an 8% yield. It is the company behind such familiar names as Standard Life.
In fact, with around 12m customers, Phoenix is a huge operation. Its focus on the retirement and savings business means that in many cases it has long-term relationships with its clients.
With deep industry expertise and that huge client base, Phoenix has proven able to generate sizeable amounts of excess cash. It is so confident it can keep doing so that it aims to grow its dividend per share annually.
It has managed that in recent years. Will it last? A stock market crash or property market crash could challenge the valuation assumptions in Phoenix’s asset base, hurting earnings.
But over the long run, I think the business has strong potential.
