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Looking for ways to make passive income? I’d invest in dividend-paying stocks via an ISA

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People look to make passive income for many reasons. The current job climate here in the UK is quite fragile, so you may be wanting to top up your income to give you a buffer. You may be looking to increase your savings to buy a house or a car. In both cases, making some extra money on the side is a great way to help. 

Making extra money is great, but ideally it should be in a passive form. This is because you’re unlikely going to have the time to actively spend on another pursuit alongside your full-time job. One great way to help in this regard is to invest in dividend-paying stocks, sheltered in an ISA.

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What’s a dividend-paying stock?

If you invest in a firm and it pays out a dividend, this is paid to you as income. By investing in the business, you become a shareholder, even if you just hold a small amount of the stock. This entitles you to a proportion of the dividend that’s usually paid out of the profits from the previous year. This makes passive income for you, as you don’t need to lift a finger once you’ve bought the stock. 

For example, say you buy £1,000 worth of stock in GlaxoSmithKline, which currently has a dividend yield of around 5.3%. If nothing changes, then you’ll receive £53 a year from the investment. This might not seem a lot, but when you add this to investments in several other stocks as well, you could easily be generating hundreds (if not thousands) in passive income from dividends being paid.

From this income, a great way to enhance the net proceeds is to buy the stocks via a Stocks and Shares ISA. The ISA enables you to receive the income without eating into your dividend allowance. Ultimately, this allows you to keep more of the dividend for yourself, which you can then use to reinvest in the same ISA. And all your returns will be tax-free too.

Stock ideas for making passive income

So how exactly can we put this idea into action? Due to the pandemic, some firms have cut dividends for this year. But there are still plenty of good companies out there for income investing. Pharmaceuticals like GlaxoSmithKline and AstraZeneca both offer attractive yields above 2% (GSK significantly above as we’ve seen). When comparing this to income available from other sources (like a Cash ISA), these are good. It’s also worth considering the potential rise in the share prices of both firms linked to work being done in relation to coronavirus. Although passive income is the main idea, realising a profit from the share price performance is an added bonus.

If you don’t feel comfortable going for this sector, you can go for conservative options within financial services. Legal & General offers high-dividend-yield potential at 9.75%!

Overall, dividend-paying stocks are a great option to help you make passive income. You know exactly the amount being paid once the dividend has been announced, so have certainty of income. The income level is also often higher than you could get on comparable interest-bearing investments.

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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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