One of the things I like about a Stocks and Shares ISA is that it allows me to build up passive income streams that hopefully can keep flowing year after year. That can be while sticking to proven blue-chip FTSE 100 businesses.
As an example of this approach, here is how an investor with £20K could target a £1,500 annual passive income stream.
Getting the right ISA
The first move would be to select the optimal Stocks and Shares ISA.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
There are lots of options available on the market and each investor has their own particular needs, so it makes sense to pay attention to what is on offer.
Even small-seeming fees and costs can add up – and eat into passive income!
Building an income stream
To generate £1,500 each year in passive income from a £20K ISA would require a 7.5% yield. That is over double the average FTSE 100 yield at the moment.
One approach would be to invest at a lower yield and compound the dividends for a few years until the target was achieved.
But in the current market, I do not think it is necessary for an investor to wait like that. I reckon they could realistically aim to achieve a 7.5% yield from the start, buying a diversified portfolio of blue-chip shares.
As that is an average, if some shares yield less it would be fine, as long as the average was balanced out by other higher-yielding ones.
Three shares to consider
As an example, here are three FTSE 100 shares I think investors could consider as part of such an approach.
Legal & General is a financial services powerhouse with a long history – and hopefully a long future ahead of it too.
It benefits from a strong brand, resilient customer demand and large existing client base. The sale of a big US business does bring a risk of lower earnings in future, though in the short term the cash proceeds should help support the beefy dividend and share buyback programme.
Legal & General yields 8.8%.
Secondly, M&G is another FTSE 100 financial services name with a chunky yield.
It yields 10.3% and the asset manager recently increased the annual payout per share.
It also has a strong brand and customer base in the millions, though one risk is that clients pulling out more funds than they put in will hurt profits.
A third share to consider is insurer Aviva (LSE: AV).
Its 6.4% yield is below the target I mentioned above, though as I explained, it could be part of a portfolio that still achieves that target overall.
Insurance benefits from large, resilient demand. Aviva is a massive force in the UK insurance sector and is set to grow further with its acquisition of rival Direct Line.
That risks distracting management attention, not least because Direct Line’s business has been struggling in recent years.
But it should offer Aviva even greater economies of scale. Meanwhile, Aviva has a large customer base, proven business model and clearly defined strategy. I see those as assets.
The FTSE 100 firm did cut its dividend in 2020 but since then the payout per share has been growing handily.
