How much passive income can an investor get each year from a new £20,000 ISA?

The new Stocks and Shares ISA year has just started. This means account holders are able to invest another £20,000 to try and generate tax-free share price returns, passive income, or both.

Let’s look at how much can someone reasonably expect to generate from a £20k ISA portfolio.

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.

Dividend yield

The simplest way to know what to expect would be to deploy the full lot into a single stock. That way, an investor would be able to quickly work out what to expect by looking at the forecast dividend yield.

For example, banking giant HSBC (LSE: HSBA) is forecast to pay a dividend of 67 cents (51p) per share for the current financial year. This translates into a yield of 6.82%, based on the current share price.

Therefore, an investor could expect approximately £1,364 back in annual dividends from a 20 grand investment. That would be more than double the forecast yield for the FTSE 100, which is currently around 3.7%.

There are even higher yields for more adventurous investors, including a pair of double-digit yielders. These are asset manager M&G and insurer Phoenix Group, whose forward-looking yields are 10.5% and 10.3%, respectively.

Investors putting £20,000 into these ultra-high-yield dividend stocks could therefore generate over £2,000 per year in passive income.

Diversification

Of course, putting the full ISA allowance of £20k into a single stock — or even just two or three — is very risky. Dividends aren’t guaranteed and each business faces its own set of unique risks. That’s why a decent level of diversification is necessary.

Returning to HSBC, its share price has fallen 19% in just one month. This is due to the brewing trade war between the US and China. The bank has widespread operations in Asia, which could be about to face significant economic pressure due to steep US tariffs.

Were a global recession to occur (which cannot be ruled out), then there would be significant earnings pressure across the financial sector. That certainty wouldn’t be a supportive backdrop for dividend growth in the near term.

Cheap-looking valuation

Taking a long-term view though, HSBC still strike me as one of the best UK dividend stocks. The bank currently has a solid dividend coverage ratio of 2. In theory, this means it should be able to pay the forecast dividend yield even if earnings take a bit of a hit.

Meanwhile, the price-to-earnings multiple is 7.9 and the price-to-book ratio is just over 1. These metrics suggest to me that the stock isn’t obviously overpriced.

While it may not seem like it with the Trump administration’s tariffs causing chaos, Asia is still tipped for strong long-term growth. That’s due to favourable demographics, a rising middle class, and continued urbanisation across the region. Tourism dollars also continue to flow into Thailand, Vietnam, Indonesia, and elsewhere.

This is why I own HSBC shares myself.

Long-term compounding

If a £20k ISA returns 8% annually on average, it would grow to around £137,000 after 25 years, with dividends reinvested. By that point, the passive income potential would be nearly £10k a year, assuming a 7% yield.

That’s without investing any more capital. Obviously, regular monthly investments along the way would likely catapult those figures much higher.