Fully using the £20k ISA allowance could make this much passive income.

Story by Jon Smith

Fully using the £20k ISA allowance could make this much passive income© Provided by The Motley Fool

Active over passive

Before we get to the specific numbers, let’s run through the process of how this would all work. Cash gets moved to the ISA, where it then becomes available to invest. By selecting shares that pay out dividends, the investor can benefit from a source of income. Typically, these dividends get paid out a couple of times a year, in line with half-year or full-year accounts.

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To keep things easy, some might just buy a FTSE 100 fund that distributes the income, using the average dividend yield of 3.54%. This is an idea, but I feel that with more active stock-picking, a much higher yield can be achieved without taking on a huge amount of risk

For example, an investor could achieve an average yield of 7% by including a dozen shares from the FTSE 100 and FTSE 250. This would include stocks from a range of sectors, with different dividend payment dates throughout the year.

Real estate options

One example that might be considered for inclusion in such a portfolio could be Land Securities Group (LSE:LAND). The firm is one of the largest commercial property owners. This ranges from office spaces right through to shopping centres.

Over the past year, the share price has been down 13%. Part of this reflects the ongoing concern around commercial property, such as the continued desire for some to work from home. Another factor is the 34.9% loan-to-value ratio from the latest results. With interest rates staying higher than expected for longer, refinancing existing loans or taking on new loans is going to cost more than previously expected.

Even though these remain risks going forward, I think it’s a good stock for an income investor to consider. The current dividend yield is 7.11%, with a dividend cover of 1.27. Any coverage figure above 1 shows that the company can pay the dividend from the latest earnings, which is a good sign.

Running the numbers

If someone were to invest £1666 a month (£20k a year) in a portfolio yielding 7%, the numbers could add up quickly. If this was kept up for seven years, then in year eight, it could make £1,154 a month in passive income.

The post Fully using the £20k ISA allowance could make this much passive income appeared first on The Motley Fool UK.