Passive income has one big advantage over other sources of earnings. You don’t have to lift a finger to earn it. In my view a great way of generating it is to invest in a Stocks and Shares ISA. Because in contrast to a job, the income you earn is entirely tax-free.
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Investing in a spread of FTSE 100 shares is a great way of generating that second income stream. UK blue-chip companies offer some of the most generous dividends in the world, with some yielding as much as 5%, 6% or 7% a year. All share price growth is on top of that.
How much do I need to invest?
Today, the median annual salary for full-time UK workers is £39,039. Matching that from an ISA takes a lot of doing, but it’s possible over time. How much you need in your pot depends on its yield, as this list shows:
- 4% – £975,975
- 5% – £780,780
- 6% – £650,650
Those are dauntingly large sums of money. Then again, we’re looking to generate a pretty hefty level of income. With time, it can be done. Let’s take the middle figure of £780,780. Let’s also assume our investor has 30 years to invest, and their portfolio grows at 9.5% a year. That’s the average return from a Stocks and Shares ISA over the last decade, with all dividends reinvested.
It’s enough to turn a £400 monthly investment into £786,756. Our investor will need to resist the temptation to dip into their ISA pot, but it shows what can be done if you start early and stick with it.
Stock markets have been volatile lately, but I can see some really attractive dividend income stocks out there. Many have spare price growth potential too.
Should I grab that bumper 7% yield?
Barratt Redrow (LSE: BTRW) has an astonishing trailing yield of 7.27%, although investors should approach it with caution right now.
UK housebuilders have struggled lately. Stretched affordability, the cost-of-living crisis, patchy wage growth and the end of the Help to Buy scheme in 2023 have all hit demand. At the same time, the rising cost of labour and materials and the fire safety cladding scandal have driven up costs.
The housing market outlook was bright at the start of the year, as markets anticipated lower interest and mortgage rates. Sadly, the Iran war wrecked that.
The Barratt Redrow share price is down almost 50% in the last 12 months. Paradoxically, I think this could be a tempting time to buy it. The shares are cheap as a result, with a price-to-earnings ratio of just 9.6.
With a long-term view, its shares look good value. But the short term is likely to remain bumpy as the UK struggles and house prices slip. Also, the board recently cut the interim dividend by 9.1% to 5p per share. The forecast yield for 2026 is 6%, lower than today.
The key question is whether Barratt Redrow can keep selling houses and funding its dividend as the UK economy slows. I think it’s worth considering for investors who are up for that challenge. However, you might find other FTSE 100 dividend stocks that appeal more right now.
Should you invest £5,000 in Barratt Redrow right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Barratt Redrow made the list?
Harvey Jones does not hold any positions in the companies mentioned.
