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There’s one very popular way to aim for regular passive income using a Stocks and Shares ISA. And picking the shares to buy doesn’t need any complicated strategy.
The idea is to go for a selection of companies paying high dividend yields. If a share costs £1, for example, and it pays 5p per share in dividends each year — that’s a 5% yield.
Reinvest those dividends every year, and the pot can add up impressively — and the potential passive income can grow and grow.
Money makes money. And the money that money makes, makes money.
– Benjamin Franklin
Let’s pause a moment
Now, there is a key risk we mustn’t overlook here. Some forecast dividend yields are high because a share price has slumped. Something has gone wrong, and investors don’t expect the cash to be paid — a forecast dividend is only an aspiration really, and is never guaranteed.
How can we protect against that? We can never avoid the risk altogether, but there are ways to reduce it. We could, for example, stick to FTSE 100 stocks. They can sometimes go bad — but historically, the top 100 UK companies have suffered fewer wipeouts than smaller ones further down the indexes.
Diversification also helps, especially if we choose shares from across different sectors. So if the biggest yields are all, say, from financial stocks… consider sacrificing a couple of higher ones for something a bit lower but with added safety through diversification.
What’s the top one?
As it happens, two of the five top dividend yields from FTSE 100 stocks right now are indeed in financial services. Legal & General (LSE: LGEN) is top of the league with an 8% yield.
An investor who started with Legal & General might, I’d suggest, consider passing up fellow insurer Standard Life in second place (on 7%), and think about Barratt Redrow with its 6.6% yield instead.
Next come more finance and property-related stocks. So maybe skip past those and look at British American Tobacco (5.9%) in eighth place? And so on.
Show me the cash!
Let’s get back to Legal & General. For simplicity, I’ll assume the same annual 8% return over the long term — though in reality, it’s surely going to vary. The following table shows how much a single investment of £10,000 today could grow over different timescales. And also how much annual passive income that could generate — all using the same 8% dividend return.
| Time | Amount | Total amount | Annual income |
| 10 years | £10,000 | £21,589 | £1,727 |
| 15 years | £10,000 | £31,722 | £2,538 |
| 20 years | £10,000 | £46,610 | £3,729 |
| 25 years | £10,000 | £68,485 | £5,479 |
| 30 years | £10,000 | £100,627 | £8,050 |
One thing stands out to me from that — the difference between 15 years and 30 years. Invest the same initial amount, keep it there with dividends reinvested for twice as long, and end up with more than three times as much income.
Different individual investors will be able to invest different amounts. And adding regular new money can make a huge difference too. I find these figures motivating… and investors might do well to consider Legal & General as part of a passive income portfolio.
Should you invest £5,000 in Legal & General Group Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Legal & General Group Plc made the list?
Alan Oscroft does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
