£20,000 in an ISA? Here’s how an investor can target £550 of income per month

There are several ways to make passive income these days. Some are wacky, including selling advertising space on your body. What I usually use is to buy shares in blue-chip companies to get dividends.

Using this time-honored approach, I can financially benefit from the competitive advantages of already successful companies.

To illustrate, here’s how a long-term investor can target £550 of passive income every month by investing £20,000 in a Stocks and Shares ISA.

Where will you start the hunt?

The first place UK investors often turn to for dividend paying stocks is FTSE 100. This makes sense, of course, since the index is made up of many blue-chip companies that have issued dividends for decades.

That doesn’t mean they will or will do it every year. I mean Tesco again Lloyds they have canceled payments in recent times (following the 2014 accounting scandal and during the pandemic, respectively). This shows that benefits are not always guaranteed.

Still, I think the FTSE 100 is a reasonable place to start hunting for income stocks. Many firms have large client bases, highly established business models, and prioritize paying large dividends to shareholders.

Passive vs active investing

The FTSE 100 Index yields about 3.5%, much higher than growth-driven growth. S&P 500. It means an investor can buy an index tracker to instantly target £700 in annual dividends from a £20,000 investment. This is known as passive investing – owning all, or selecting selected, stocks in an index rather than picking and choosing.

However, an investor can currently get a higher yield than 3.5% by simply buying UK government bonds or by putting the cash into a risk-free savings account.

A practical approach, which is how I invest, involves picking individual stocks to target high returns. Take it Aviva (LSE: AV.), for example. I own shares of this UK insurer and asset manager because of the 6.7% dividend yield it offers.

Currently, the company is doing very well. In the third quarter, general insurance premiums were up 15% while net inflows of £7.7bn in corporate wealth were up 21%. Amazingly, it now has 5m UK customers with more than one policy.

CEO Amanda Blanc commented: “Quarter after quarter, we deliver consistently higher results and growing Aviva, especially in the lightest businesses..”

Naturally, the company will be exposed to any major economic downturn, as this could force high-net-worth customers to cancel policies. That can be detrimental to earnings and dividend growth.

However, despite rising nearly 10% already by 2025, the stock still trades cheaply at 10.6 times earnings. And the 2025 forecast yield is a juicy 7.6% (almost twice the FTSE 100 average).

Currently trading at 510p, I think the shares offer great value.

Integration

If an investor built a £20k portfolio of stocks yielding an average of 7.6%, the annual passive income would be a substantial £1,520.

To really maximize the income opportunity, an investor can consider compounding those gains over time. In other words, reinvesting profits instead of using them.

In this case, after 20 years, the ISA portfolio will be throwing away tax-free income of around £550 a month, on average. That would be without investing more money outside.

Obviously, these numbers can be much higher with regular investments made over time.