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A stocks and shares ISA can be a useful platform for generating both short and long-term passive income streams.
If you wanted to focus a £20k ISA on generating passive income, starting this year, this is how you would do it.
Prepare an ISA to invest
My first step, of course, would be to choose a stocks and Shares ISA and then put the £20,000 in there, ready to invest.
If you didn't want passive income now, you could increase the dividends and hopefully earn more in the long run.
But, in this example, I plan to withdraw dividends as I earn them, to reach an annual income of £1,380.
doing the math
That amount equates to an average return of 6.9% on my ISA. With £20,000, I would diversify by spreading my investment across five to ten different stocks.
On average, that means not every stock I own needs to yield 6.9%. Some could offer much less, as long as my average was 6.9%.
At the moment, the average FTSE 100 The yield is 3.6%. So my goal is quite a bit above that.
But I think it can be achieved in today's market. There are a number of sectors, from tobacco to financial services, where good quality companies currently return 6%, 7% or even more.
As an example, consider group of men (LSE: EMG) with its 6.4% yield.
He FTSE 250 The company is trading at a P/E ratio of 13, which I think is fair. It has been consistently profitable in recent years. Last year, for example, after after-tax profits fell 61%, they still amounted to $234 million.
Does that drop reflect a company with deep-rooted problems? I don't see it that way. Rather, I think it's indicative of the type of earnings swings often seen at investment management firms like Man.
The company had about $175 billion in assets under management at the end of September. It has a well-established customer base and a solid reputation, having been in business for over two centuries.
One risk I see is that choppy markets lead investors to withdraw funds, hurting profits. Assets under management fell in the most recent quarter, something I wouldn't want to see repeated if I owned the stock. This year the interim dividend has remained at its previous level.
Building an income machine
I think Man is a stock that investors should consider when looking for sources of income.
By using an ISA to buy shares in a number of impressive companies across a range of economic sectors, I think you could realistically target £1,380 in passive income in 2025 and annually.
However, dividends are never guaranteed to last, so it would take me a while to find exactly the type of income share I wanted.
