Edward Sheldon, CFA

£10k in an ISA? Here’s how to generate a ton of passive income

Passive income can provide a lot more financial freedom and security. Here’s an easy way to generate some within an ISA account.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

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Passive income’s a hot topic in the financial world right now and it’s easy to see why. When creating this form of income, it brings with it a lot more financial flexibility.

The good news is that today, there are more opportunities to create passive income than ever before. With that in mind, here’s an easy way to generate a ton of it within an ISA.

Easy income

One of the simplest ways to generate passive income today is to invest in dividend stocks. These stocks – which are available within Stocks and Shares ISAs – pay investors regular cash income out of company profits.

With these investments, creating an income stream is easy. All that’s needed is to buy one or more stocks. The investor can then kick back and let the cash (dividends) roll in.

Now, the amount of income generated will depend on the dividend yields of the stocks selected. You can think of a dividend yield like an interest rate.

However, on the London Stock Exchange today there are many decent stocks with yields of 6% and higher.

Putting together a portfolio of stocks with an average yield of 6% could potentially generate £600 in passive income a year (completely tax-free) from a £10k investment in an ISA. Constructing a portfolio with an average yield of 7% can create £700 in cash flow a year.

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.

Two things to know

What’s the catch? Well there are two. The first is that, unlike savings account interest, dividends are never guaranteed. If a company is experiencing financial difficulties it may decide to reduce or cancel its payout.

The second is that the share prices of dividend stocks can go down as well as up. So the value of an investment can fall.

Given these two issues, it’s a good idea to focus on higher-quality dividend stocks (that aren’t likely to experience significant share price weakness or cut their dividends) and not just blindly buy a bunch of high-yielders.