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Investing in Stocks and Shares in an ISA to create a passive income stream is ideal for those with £20,000 a year to invest. But what about the majority of us who can save very little?
Well, I don’t come close to the ISA limit every year, but I’ve been using them since they were introduced.
How much is £5 a day? Not much considering the prices of things these days. Yet even a small sum like this adds up to £1,825 a year (plus an extra fiver every leap year).
Shares you can buy
I wouldn’t directly pay £5 every day into my ISA, although it would be perfectly possible to do that. No, I prefer to transfer the money every month and let it build that way. I’ll just make sure it comes to at least my daily minimum of £5.
But what will I actually buy? Over the past decades, I have traveled a lot FTSE 100 dividend paying stocks. And I see no reason to change that.
So let’s look at one that I bought a few years ago, Aviva (LSE: AV.). The insurance giant currently offers a dividend yield of 7.5%, which is predicted to rise.
Buy what I know
I think it’s important to understand where my dividend money comes from. Otherwise, I would just be guessing and gambling.
With Aviva, that’s life, accident and all types of general insurance. And savings, pensions and investment services. Those are businesses that can generate strong cash flow.
But wait, is insurance risk-free? Yes, yes, some years insurers have to pay huge sums of money. And financial services can have bad years.
It’s also very competitive, and Aviva’s pricing has been underperforming for the past decade.
Combined assignments
But I still like the idea of my assignments being combined over the years. They are not guaranteed, and I expect to see lower yields in insurance stocks in some years.
But 7.5% of £1,825 is £137 a year (bar a few pence). It might not sound like much, but it’s better than the £95 I can get from today’s best Cash ISAs. And, although guaranteed, Cash ISA rates will have to fall due to Bank of England cuts.
Anyway, I haven’t claimed the income yet, so I’ll pay it back with next year’s money. Next year, I should start with £1,962 on which I will earn 7.5% (on top of next year’s £1,825), and so on. In fact, forecasts put Aviva’s yield at 8.4% by 2025.
Distribute the money
Aviva is 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 crash. That was not good.
In fact, I can distinguish between the shares of shares from different sectors. There are several decent FTSE 100 stocks to choose from.
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