How I’d invest a £20k ISA to target £1,500 a year in passive income

Passive income is the holy grail for many investors, myself included. This can be achieved by investing in dividend stocks that pay shareholders in regular instalments. However, it’s worth remembering that dividends are by no means guaranteed.

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Mature friends at a dinner party

So today, I’m looking at how much passive income I could realistically generate from £20,000 — the maximum ISA allowance for a year.

‘Realistically’ is the operative word here. There are some double-digit dividend yields out there, but history has shown us that these are largely unsustainable.

Instead, I need to be looking at well-covered yields and companies with a strong business. So let’s take a look at a handful of companies that could help me turn £20,000 in £1,500 a year.

Spreading the risk

I don’t want to put all my eggs in one basket. But, equally, when investing in stocks and shares, I need to do my research. I don’t want to spread myself too wide as I may struggle to keep up with all the research and developments around the stocks I own.

As such, I’d look to split £20,000 four or five ways. I know other investors would probably look for 10 stocks or more. But personally, I like to feel like I’m in control. In fact, I recently sold several small holdings I owned.

In order to achieve £1,500 a year from £20,000, I need to invest in companies offering, on average, a 7.5% dividend yield. That’s some distance above the average, but it’s very achievable. So here are a few companies I’d buy to achieve my objective.

One company I’d buy is Sociedad Quimica y Minera De Chile. I recently added the Chilean lithium miner to my portfolio for its upside potential and attractive 7.8% dividend yield.

The stock remains the top pick by Scotiabank and a host of analysts still suggest the miner is undervalued, despite its impressive surge over the past 18 months.

It’s quite dependent on lithium revenues, and that could be seen as a risk, especially amid a slowing global economy. But the increasingly precious metal is a key component of the electrification agenda.

Rising dividend

Legal & General is another pick. I’ve got this one in my portfolio, but I’ll buy more. The company set out its dividend policy in 2020 for the next five years, promising a 5% year-on-year increase in the total dividend.

The blue-chip stock currently offers a 7.5% dividend yield and, at the last count, had coverage of around 1.85 — 2.0 would be healthier.

In November, the company told the market it expected to deliver full-year operating profit growth and capital generation in line with its guidance. There are no signs the dividend might be in danger despite concerns about the UK economy.

Another option is life insurance specialist Phoenix Group. It’s currently offering a dividend yield of 7.7%. The firm buys out and manages legacy life insurance and pension funds that are closed to new business and manages them. It’s not massively exciting, but the company is well managed.

Both the aforementioned stocks may suffer amid a failing UK economy as demand for financial services lags. But broadly, I think the risks have been priced in, and the long-term outlook is positive. I’ve also recently bought Phoenix Group shares.

The post How I’d invest a £20k ISA to target £1,500 a year in passive income appeared first on The Motley Fool UK.

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James Fox has positions in Legal & General Group, Phoenix Group Holdings Plc and Sociedad Quimica y Minera de Chile S.A.. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.