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How I’d invest £10k in an ISA today for passive income of £50 a month

Mature couple in a discussion while eating a meal in a restaurant.
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The deadline for using this year’s Stocks and Shares ISA allowance is less than four weeks away, and I’d use mine to generate passive income from FTSE 100 shares. That way all my dividend income and capital growth will be tax-free for life.

Investing in the Stocks and Shares ISA allowance has always made sense, taxwise, but now even more than ever, as chancellor Jeremy Hunt will cut the capital gains tax and dividend allowances from 6 April (and again in 2024).

I’m investing tax-free

Every UK adult can invest up to £20,000 in an ISA this tax year, but most cannot afford that much. Happily, smaller sums could also create a decent level of passive income. I could generate income of at least £50 a month today by investing just half my ISA allowance, or £10,000.

Better still, that income would rise over time. That’s because FTSE 100 companies aim to increase their dividend payouts, year after year, as profits rise.

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.

Dividend growth isn’t guaranteed, of course. Company profits dip could dip, hitting the necessary cash flows. Or we get a major macro shock, such as the 2020 Covid pandemic, when dozens of dividends were suspended. Yet over the long run, the direction is upwards.

To generate income of £50 a month from £10k, or £600 a year, I would need to find shares that yield 6% or more. Happily, there are plenty of those on the FTSE 100. A quick search throws up a thumping 10 stocks that would get me there.

Asset manager abrdn currently yields 6.28% a year. Insurer Aviva yields 6.45%. British American Tobacco yields 6.9%. Another cigarette maker, Imperial Brands, yields 7.03%.

Mining giant Rio Tinto (6.97%), insurers Legal & General Group (7.41%) and Phoenix Group Holdings (7.69%) yield even more. The biggest dividend yields on the index come courtesy of housebuilder Barratt Developments (8.23%), asset manager M&G (8.46%) and high street bank NatWest (10.38%).

Combining these stocks in any proportion would help me beat my £50 monthly income target. If I split my £10k evenly between the two most generous dividend payers, M&G and NatWest, I would generate £942 a year, or £78.50 a month.

I’m building a balanced portfolio

I’m not sure I could do that. Outsize yields tend not to last long. Housebuilder Persimmon and Rio Tinto both double-digit yields at the start of the year. Neither yields have survived. I would rather generate a sustainable, growing income stream rather than get a deluge one year and nothing the next.

Happily, most of my 10 high-yielders have a proud dividend track record. Barratt recently stood by its shareholder payout, despite housing market uncertainty.

Better still, many are available at low valuations today. For example, Barratt trades at just 5.2 times earnings, with L&G (6.8 times), British American Tobacco (8.5) and Rio Tinto (8.6) also looking good value.

That would give me the confidence to buy them ahead of this year’s ISA cut-off on 5 April. Then I’d let my passive income roll up for years and years, until it paid me a lot more than £50 a month.

The post How I’d invest £10k in an ISA today for passive income of £50 a month appeared first on The Motley Fool UK.

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Harvey Jones has positions in Rio Tinto Group. The Motley Fool UK has recommended British American Tobacco P.l.c. and Imperial Brands Plc. 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.

Motley Fool UK 2023