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.
A dividend stock I like
One stock I like for passive income today is National Grid (LSE: NG.). A leading utilities company, it operates the electric power transmission network for Britain.
Now, the dividend yield here isn’t the highest out there. This year, the company’s expected to pay out 58.1p per share in dividends, which translates to a yield of about 5.7% at today’s share price.
But this is a company with a great long-term track record when it comes to paying dividends. Typically, the payout is increased in line with inflation.
It’s also a relatively stable stock. This is illustrated by the fact it has a ‘beta’ of 0.40, which means that for every 1% move in the UK stock market (up and down), the stock only moves 0.40%.
Of course, there are risks here. One is the fact that the company has a lot of debt on its balance sheet (most utilities companies do). This could put pressure on the stock if interest rates keep rising.
Overall though, I see it as a solid pick for passive income. If generating income was my financial goal (I prefer to invest for long-term growth), I’d definitely consider an investment in National Grid.
