See how UK shares could fund a stellar £24k a year passive income in an ISA
Harvey Jones crunches the numbers to see how long it might take to build a bumper passive income using high-yield FTSE 100 dividend stocks.
Posted by Harvey Jones
Published 3 August
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Passive income has always appealed to me. Who wouldn’t want to build up a steady cash flow from solid dividend stocks while doing little more than checking their Stocks and Shares ISA from time to time?
Generating income of £2,000 a month, or £24,000 a year, won’t happen overnight. Under the 4% safe withdrawal rate (which states that your portfolio shouldn’t run dry even if you draw income for decades), it would take a hefty £600,000 to hit that income target.
If an investor upped their withdrawals to 7%, they’d earn more income but might have to dip into their pot from time to time. At that level, they’d need around £342,815 to reach their goal. That’s achievable with long-term discipline.
Digging for dividends
One way I try to reduce the size of the required pot is by focusing on high-yielding shares. Among the FTSE 100, one that stands out for income today is commercial property giant Land Securities Group (LSE: LAND), which has a trailing yield of just over 7%.
Landsec owns prime central London offices and big retail destinations across the UK. Lately, it’s had a tough run. The share price has fallen 10% over 12 months and 20% over three years.
The reasons are clear enough. High interest rates have made property less attractive, inflation has pushed up costs, and the work-from-home trend still squeezes office demand. None of these are easily fixed.
Tempting P/E ratio
In May, Landsec posted full-year EPRA earnings of £374m (after property and derivate revaluations, and profits and losses on disposals), just ahead of last year’s £371m. Occupancy reached a five-year high of 97.2%. The dividend rose just 2% to 40.4p a share. It clearly faces challenges, but now could be a tempting time to consider buying.
The stock trades on a modest price-to-earnings ratio of 11.5, which looks like reasonable value to me. If interest rates start falling and the UK economy picks up, that should help. Landsec is also making a push into residential property, which may provide more stable returns in future, although that’s no guaranteed win.
Landsec wouldn’t be my first income pick, but it could still play a role in a wider ISA income portfolio of 15 or more FTSE 100 stocks offering a mix of growth and dividends.
Dividends and growth
Of course, building up a six-figure portfolio won’t happen overnight. But it’s more achievable than it sounds with early and regular saving.
Someone starting at age 30 and investing £200 a month in a Stocks and Shares ISA could hit £354,992 by 65. That assumes 7% average annual returns, roughly in line with the FTSE 100 average. If they increased their contributions every year, in line with inflation, they should end up with a lot more, although that’s not guaranteed.
Pick the right stocks, reinvest the income and keep at it for decades. That’s my strategy. A reliable second income could be the reward — or even better, full financial independence. Either way, it all starts with a plan and a long-term approach. It’s hard to beat passive income.
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