How to use a £20k ISA to invest for income

We all would like to earn income, right? I mean, who wouldn’t want regular money coming in that we don’t have to work for?

I think the £20,000 annual ISA allowance is ideal for those of us investing for the long term. Every profit we make in an ISA is tax-free, even for those who have already built up a million or more in their accounts. (And thousands have achieved that, by the way.)

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.

What can we get?

One thing I like about ISA is that it is flexible. We often hear the old adage to not let the tax tail wag the investment dog, and that makes sense. A bad investment is still a bad investment even if we don’t pay tax on it.

But an ISA is just a wrap, and we can use it to protect a whole range of investments. How well we do is entirely our responsibility.

For me, choosing what to go with is easy. It’s a Stocks and Shares ISA all the time, even if it gives me more risk to deal with. Over the past decade, Stocks and Shares ISAs have averaged 9.6%. In 2019-2020, however, we saw a painful loss of 13%.

However, over the past 20 years, the average annual return from FTSE 100 came in at 6.9%. And that’s close to the long-term value.

Stocks to consider

So the first thing. I think investing in the stock market requires at least 10 years, ideally 20 or more. During that time, the probability of stocks losing money is getting lower and lower.

There are two other important ways to deal with risk. One is diversification, putting our money in many companies in different businesses. Financial crash? The pharmaceutical and energy sectors were good, for example.

Then I try to invest in top companies in industries that seem like they could go on forever. Ideally, they’ll have a defensive bottom line, generate strong cash flow, and pay solid dividends.

I’m looking National Grid (LSE: NG.) as a passive income buyout candidate. The dividend yield is forecast at 5.9%, which is close to the 20-year FTSE 100 return alone.

A cash cow is important

National Grid provides an essential service, and is well protected from competition. But there is a side where he likes me a little. The cost of maintaining and developing its network in the coming years.

A new £7bn rights issue to help fund its plans led to a fall in share prices this summer. If it happens again, it may lower the share price again. And it may hit a dividend.

In addition, National Grid generated £7.3bn in cash flow from continuing operations in its last full year. And that’s exactly what I want to generate long-term income to reinvest in the future.

Individual investors need to improve their investment strategies. But this is the type of stock I go for in my diversified ISA.