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The start of a new year can always be a useful moment to think about how to earn more money. One simple but potentially powerful passive income generation idea can be to load a Stocks and Shares ISA up with stakes in quality businesses that look set to pay handsome dividends.
Making the most of your ISA allowance
For most people, the annual contribution allowance for a Stocks and Shares ISA is £20k.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
So, someone could put in up to £20K between now and the first week of April, if they have not done so already during this tax year. Then, as a new tax year starts, they could do the same all over again.
Fees, commissions and other charges can eat into the passive income streams that an ISA generates.
So it pays to take some time when choosing a Stocks and Shares ISA.
Earning income from others’ work
How much income the ISA generates will depend on the average dividend yield of the shares in it.
Say someone earns a 7% yield overall. That would equate to £1,400 per year of passive income.
Starting today, that could potentially mean £1,400 this year alone, as well as in subsequent years.
Dividends are never guaranteed, though. So it is important to focus carefully on the quality and value of the shares chosen.
Keeping the Stocks and Shares ISA diversified is also a simple but important risk management strategy, in case one company disappoints.
The current FTSE 100 yield is 3.1%, so my target may seem ambitious. But in today’s market I think it is realistic even from a diversified selection of blue-chip FTSE 100 businesses.
One income share to consider
For example, one FTSE 100 dividend share I think investors should consider is Phoenix Group (LSE: PHNX).
It is not a household name. That explains why it plans to change its name to Standard Life plc in March. That will help Phoenix get more out of one of its very well known brands.
Standard Life is just one of the businesses in Phoenix’s stable of long-term retirement and savings firms. With around 12m clients, Phoenix is a big business with significant cash generation potential.
That matters from an income perspective, as that cash generation can help fund shareholder payouts.
Phoenix aims to grow its dividend per share annually, as it has done in recent years. Even though its share price soared last year, the share still yields 7.5%.
That share price performance partly reflected some investors getting more excited about the long-term potential of the business.
I do see a risk that its mortgage book could take some larger than planned losses if the property market slumps. The rebranding will also bring some costs that could eat into 2026 profits.
Still, I see Phoenix as worth considering for a Stocks and Shares ISA given its strong income potential.
