£1,000 a month in income? Here’s how investors can get started with a £20k ISA

Trying to find all the odd and passive income ideas can be overwhelming. Rather than trying something risky, experienced investors prefer to focus on a tried and tested approach.

For decades, British investors have sworn by the regular income that dividend stocks deliver. With FTSE 100 With an average yield of around 3.5%, the index promises a more lucrative dividend yield than its US peers.

With a Stocks and Dividends ISA, UK residents can invest up to £20k a year tax-free on capital gains. These self-directed investment accounts allow the owner to choose from a wide variety of assets, including stocks, commodities and investment trusts.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

Growth over time

By choosing a mix of high-yielding stocks, many UK investors have been able to achieve an average yield of around 6%. That would pay just £1,200 a year on dividends on £20k.

By investing the full £20k each year, over eight years, the pot could reach $231,000 (with profits reinvested). That would pay £12,000 a year in dividends, or £1,000 a month.

Of course, £20k is a lot to save every year. But even on half that amount (£10k a year) the same dividend yield can be achieved over 12 years.

Stock selection

A general rule of thumb states that a combination of about 10 stocks provides enough diversification for a portfolio. Rather than simply choosing high-yielding stocks, many investors also include some defensive stocks or index trackers.

This can help keep the portfolio stable during volatile economic times. Some defensive stocks also pay a decent dividend, for example, Unileverwith a yield of 3.3%, or GSKby 4.5%.

Naturally, these low-yielding stocks will have to be diluted at higher rates to reach a positive rate. But too high a yield can be an indicator of financial problems so it’s important to dig deeper.

One example

That’s why I like it Aviva (LSE: AV). It may have lower profits than other UK insurance companies but it has a long payment history. I also think it strikes a good balance of capital allocation between business and equity.

Looking back, the company has cut dividends several times. This may seem bad until you consider how he used this savings to improve operations. That is why the share price has increased by 17.4% in the last five years. Many other UK insurance companies are not good at the same time.

Of course, that doesn’t mean it’s risk-free. Like most insurers, Aviva invests in fixed income securities that are affected by interest rates. If interest rates fall, it can hurt the company’s bottom line. In the highly competitive UK insurance industry, you cannot risk losing market share by failing to delight customers.

But I think it looks in good shape. It surprised analysts in its first-half 2024 results, with earnings coming in 10% higher than expected. Revenue is now expected to exceed £39bn a year, significantly higher than the £27.4bn achieved by 2023.

I hold shares as part of my income portfolio and will continue to feed the investment through 2025.