2026 has just begun, and investors may be wondering how they can start to make passive income this year.
One great way to achieve this is to consider investing in stocks, especially dividend stocks, with high and reliable yields.
Through a Stocks and Shares ISA, this can be achieved in a tax-efficient manner. Up to £20,000 a year can be invested into this type of account. What’s so sweet about it is that the dividends received are exempt from tax.
Furthermore, if you decide to sell your stocks, the gains are exempt from capital gains tax.
Let’s see how an investor could build a passive income machine from this that could target a monthly income of £1,800.
Also, I’m going to look at a great dividend stock to consider buying for this portfolio.
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.
How to target £1,800 a month
Now, to target a second income of £1,800, it will be helpful for investors to aim for a high dividend yield in their passive income portfolio.
For example, the FTSE 100 as a whole yields 3%, but I believe it’s very possible to achieve a dividend yield of 5% by focusing on high-yield stocks.
With this in mind, investors would need £432,000 today to make £21,600 a year, which translates to £1,800 a month.
This is a substantial sum; I doubt many readers have that much spare to use.
However, if an investor starts by using a much more reasonable £14,000 of our ISA allowance today, and then invests £500 a month into our portfolios, they could make this sum within 12 years.
This is based on some conservative assumptions that both the dividends and value of shares increase by just 2% per year. Dividends will also need to be reinvested.
By the end of the twelfth year, £521,917 would have been saved up. With this amount, investors could make even more than £1,800. They would make £2,174.65.
It’s important to bear in mind that dividends aren’t guaranteed. But it’s still an interesting analysis of how making additional income over time is possible.
Let’s now look at Legal & General (LSE:LGEN) shares. With its juicy dividend yield of 8.2%, it’s the highest-yielding stock in the Footsie. It therefore perfectly fits the description of what is needed in our passive income investor’s portfolio.
Legal & General
With Legal & General shares, an investor would only need £263,415 to target their £1,800 second income.
This would only take just over nine years to save up based on the conditions above.
Having a diversified portfolio is important, though, so the company’s shares could be used to pull the average yield of the portfolio up, as opposed to all of it being concentrated on this one stock.
Moreover, the financial services firm has an incredibly strong track record of growing its dividend. Since 2009, it has only failed to do this once, and that’s when it maintained it due to the pandemic.
However, it should be noted that the company has a low dividend cover of only 0.94. This means it’s paying out more in dividends than the profit it’s making.
If earnings weaken, this could make the dividend vulnerable. That said, I still think it’s worth an investor to consider buying some Legal & General shares as part of a diversified portfolio.
