Buying FTSE 100 companies inside a Stocks and Shares ISA is a brilliant way to generate a passive income stream. The UK’s blue-chip index is packed with top dividend stocks, many yielding 6%, 7% or even 8% a year.
Investors shouldn’t just go for the highest yield. That income should appear sustainable over the longer run. They should look for share price growth potential as well. So what’s out there today?
The annual ISA deadline is less than a month away (5 April), but many will be nervous due to the war in Iran. However, current volatility does offer an opportunity to pick up FTSE 100 stocks at a cheaper price. But investors should only seize it if they can stay invested for at least five years, and ideally longer, to give their stock picks time to recover, compound and grow.
FTSE 100 dividend stars
Let’s say an investor contributed the annual maximum of £20,000 into an ISA and put it all into Legal & General (LSE: LGEN) shares. The FTSE 100 insurer and asset manager currently offers the highest trailing dividend yield on the index at just over 8.3%. And it’s forecast to yield roughly 8.5% in 2026. So a £20k investment should potentially generate around £1,700 in dividends in year one.
Ultra-high yields like this can be fragile, because the underlying business has to generate plenty of free cash flow to fund them. I think Legal & General can do that. It has a solid track record of increasing dividends every year since the financial crisis. The exception was 2020 when it froze shareholder payouts. In its defence, that was during the pandemic.
The board aims to raise the dividend by around 2% a year going forward, with share buybacks on top. In total, it plans to return more than £5bn to shareholders between 2025 and 2027. It also looks financially solid, with a robust Solvency II coverage ratio of roughly 217%.
Legal & General shares struggle
The shares have underperformed, rising just 5% over the last year and falling 7% over five. If today’s volatility turns into a full-blown correction, they could take another hit. However, with a forward price-to-earnings ratio of around 11, the stock’s worth considering for income-focused investors.
No investor should put their full annual ISA into one stock unless they already have a large portfolio. But if an investor combined a share like Legal & General with a stock yielding 5% and another yielding 6%, they’d potentially generate an average yield of around 6.5%. On £20,000, that would produce £1,300 in income over the next 12 months, assuming dividends hold up in today’s turmoil.
But the real benefits come over time by reinvesting those dividends to buy more shares and letting them compound and grow. Today’s market dip could prove a useful opportunity. I can see some attractively -priced, high-yielding FTSE 100 shares around right now. As ever, only consider buying a long-term view.
