A Stocks and Shares ISA can be a useful platform for building passive income streams over both the short and long term.
If I wanted to focus a £20k ISA on generating passive income, starting as soon as this year, here is how I would go about it.
Getting an ISA ready to invest
My first move, of course, would be to choose a Stocks and Shares ISA then put the £20k into it, ready to invest.
If I did not want passive income now, I could compound the dividends and hopefully earn more over the long run.
But, in this example, I foresee taking the dividends out as I earn them, to target yearly income of £1,380.
Doing the maths
That amount equates to a 6.9% average yield from my ISA. With £20k, I would diversify by spreading my investment across five to 10 different shares.
As an average, that means not every share I own needs to yield 6.9%. Some might offer significantly less, as long as my average still came in at 6.9%.
At the moment, the average FTSE 100 yield is 3.6%. So my goal is a considerable bit above that.
But I think it is achievable in today’s market. There are a number of sectors, from tobacco to financial services, with good quality companies currently yielding 6%, 7%, or even more.
As an example, consider Man Group (LSE: EMG) with its 6.4% yield.
The FTSE 250 company trades on a price-to-earnings ratio of 13, which I think is fair. It has been consistently profitable in recent years. Last year, for example, after profits after tax fell by 61%, they still came in at $234m.
Does that fall reflect a company with deep-rooted problems? I do not see it that way. Rather, I think it is indicative of the sorts of swings in earnings often seen in investment management firms like Man.
The company had around $175bn of assets under management at the end of September. It has a well-established customer base and a strong reputation, having been in business for more than two centuries already.
One risk I see is choppy markets leading to investors withdrawing funds, hurting profits. Assets under management fell in the most recent quarter, not something I would like to see repeated if I owned the share. This year the interim dividend has been maintained at its previous level.
Building an income machine
I think Man is a share investors should consider as they look for income sources.
By using an ISA to buy shares in a number of impressive businesses in a range of economic sectors, I think I could realistically target £1,380 in passive income in 2025 and annually.
No dividend is ever guaranteed to last, though, so I would take time to find exactly the sort of income shares I wanted.
