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Investing in a stocks and shares ISA to create a passive income stream is great for those who have £20,000 a year to invest. But what about the majority of us who can save much less?
Well, I don't get close to the ISA limit every year, but I still use them since they were introduced.
How much does £5 a day cost? It's not much when we look at the prices of things these days. However, even a modest sum like that adds up to £1,825 a year (plus an extra £5 each leap year).
stocks to buy
I may not specifically pay £5 every day into my ISA, although it would be perfectly feasible to do so. No, I prefer to transfer some money each month and let it accumulate. I'll make sure it reaches at least my daily minimum of £5.
But what will I really buy? Over the decades, I have mainly chosen FTSE 100 stocks that pay dividends. And I don't see any reason to change that.
So let's take a look at one I bought a few years ago. Aviva (LSE: AV.). The insurance giant currently offers a forecast dividend yield of 7.5%, which is expected to increase.
buy what you know
I think it's important to understand where the cash for my dividends comes from. Otherwise, you would just be guessing and gambling.
With Aviva, that's life, accident and all types of general insurance cover. And savings, pensions and investment services. These are businesses that can generate strong cash flow.
But wait, isn't insurance risky? Well, yes, some years insurers have to pay huge sums. And financial services can have bad years.
It's also very competitive and Aviva's share price has performed poorly over the last decade.
Compound Dividends
But I still like the idea of my dividends accumulating over the years. They are not guaranteed and I expect to see lower returns from insurance stocks some years.
But 7.5% of £1,825 is equivalent to £137 in a year (except a few pennies). It may not sound like much, but it's better than the £95 you could get from today's best cash ISAs. And, although guaranteed, Cash ISA rates will have to fall in response to the Bank of England cuts.
Still, I don't want the income yet, so I would reinvest it with next year's cash. Next year you would have to start with £1,962 of which you would earn 7.5% (on top of next year's £1,825), and so on. In fact, forecasts place Aviva's dividend yield at 8.4% in 2025.
Distribute the cash
Aviva is just one example, but it would be too risky to put all my eggs in the insurance basket. I knew someone who had all his money in bank stocks right before the financial crisis. That was not pleasant.
You would actually diversify dividend stocks from a variety of sectors. There are quite a few decent FTSE 100 dividends to choose from.
