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It's spring and investors' thoughts are focused on passive income. And what better way than with our new £20,000 ISA contribution limit?
We could opt for a cash ISA, and some of them pay around 5% currently. And it's guaranteed, at least for the duration of the deal.
But interest can't stay that high when the Bank of England starts cutting base rates, right?
Risk and reward
As with so many things in life, we have to balance risk and reward.
Over the long term, the UK stock market has outperformed other forms of investment. But it has had bad streaks, like the last decade.
However, there are ways to reduce the risk.
One way is what I consider to be playing percentage shots. Using a sports term, if we play the shots that are most likely to have modest success rather than pursuing riskier opportunities for glory, we may have a better chance of coming out ahead in the long run.
Let's compare a couple of UK stocks.
Big dividend
Vodafone (LSE: VOD) has been paying some of the FTSE 100The biggest dividends. We're talking serious money here, with yields exceeding 10%. And if that's not a good path to passive income, what is?
Well, Vodafone hasn't taken home profits to cover the dividend. Investors can see it. And a huge sell-off over the past 10 years has sent the stock price down 74%.
What's the point of big dividends if we lose most of our initial stake?
Oh, and Vodafone will cut its dividend in 2025, although shareholders should receive a final 10% by 2024.
Still, it's part of Vodafone's refocusing and I think the stock could have a good future now. But back to my point…
Steady income
Let's compare that to a share that I rate as possibly the most reliable dividend payer on the FTSE 100. I'm talking about National Network (LSE: NG.), with a dividend forecast of 5.4% for 2024.
It's not the biggest. But it has increased for more than 25 years. And over the last 10 years, the share price has gained 19%.
That's not a lot of growth. But it's a few points ahead of the Footsie, which I think is good in the decade we've had.
National Grid faces a reduction in gas distribution. And it is in a regulated industry where a minimum investment is often required. Therefore, it is not risk-free and the dividend is far from guaranteed.
Percentage shot
But I rate it as the percentage shot, while Vodafone was the shot at glory.
Still, I think we can do better than a 5.4% yield. But we do need to reduce the risk a little. By spreading my ISA cash across a diversified range of dividend stocks, I hope to be able to earn 7% a year.
A full ISA grant invested at that rate could accumulate more than £75,000 over 20 years. And then that could generate £6,800 a year in passive income.
Or someone who can save the full £20,000 each year could generate more than £850,000, for an annual passive income of £60,000.
