The new tax year is with us, which means plenty of folks will be looking at their Stocks and Shares ISA to work towards their passive income goals. One question that might be on minds is: how to achieve a relatively small income stream of £50 a month in the ISA? And will the full £20k (the yearly maximum deposit) be needed to achieve that figure? Let’s answer both questions.
Methods
One popular method of building passive income through an ISA is to target high-yielding dividend stocks. The best of these stocks deliver cash on a regular basis from the earnings of the company. And because they’re paid directly, the income is truly passive. All that’s required is logging into the app once a quarter or two and the money will have been deposited automatically.
What’s a realistic return from such stocks? In the first year, it’s best not to count on much more than 5%. Most stocks pay less than that. And the ones that pay more come with risks. For example, it’s rare to see a stock get near 10% without a dividend cut or a share price increase to cancel it out.
Let’s go back to that £50 a month target (equal to £600 a year). With a 5% return from dividends, an investor would need to invest £12,000 into the ISA to achieve it. That’s some way under the £20,000 deposit limit too. Although savvy investors will know that there’s a lot more to investing than the very first year.
By choosing a stock with a growing dividend and by reinvesting the dividends received, the passive income could grow over the years. With a dividend growth rate of 5% for example, by year five, the passive income is £86 a month and by year 10 the income is £157 a month. While dividends are never guaranteed, this is how people can work towards turning their passive income into a true second income.
Which stocks might fit the bill?
Is this stock worth a look?
I think Aviva (LSE: AV.) is one worth considering. The insurance giant has a dividend yield of 6.1%, which has been growing at an average of 6.57% a year for the last decade. That’s above the FTSE 100 average on both counts. The share price has been rising in recent years too.
The other side of investing in dividend stocks for passive income is never guaranteed. Aviva cancelled the dividend during the pandemic at the height of the panic. That turned out to be more a temporary blip than lasting crisis, but you never know what’s around the corner. A big crisis hitting the UK economy would affect stocks of all stripes.
On balance? Investing for dividends through a Stocks and Shares ISA is an important step in building wealth. While no one can say what the future has in store, there will always be some stocks that outperform the average. I believe Aviva could be worth further research for that reason.
