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Who doesn’t dream of earning £1,000 a month while doing absolutely nothing? That’s the beauty of passive income, and one of the most popular ways to achieve it here in the UK is through a Stocks and Shares ISA.
With its generous £20,000 annual tax-free allowance, it leaves Cash ISAs in the dust for long-term wealth building. Over the last decade, Stocks and Shares ISAs have delivered average annual returns of 9.6%. At that rate, a portfolio worth £125,000 could deliver £12,000 a year, or £1,000 a month — completely tax-free.
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.
Of course, getting there takes time. But with £300 invested monthly in a portfolio yielding 7%, you could hit that target in about 16 years — faster with a decent head start.
So what kind of stocks do I like? Well, the following three FTSE 100 dividend mega-brands are certainly worth considering.
British American Tobacco
First up is a regular feature on most income investors’ lists: British American Tobacco. This cash-generating giant has paid out dividends for over two decades, growing them for 19 of those. Right now, it’s yielding 5.7% — lower than usual, but not bad.
It boasts a solid balance sheet, healthy operating cash flow and a well-managed shift into next-gen nicotine alternatives like vapes and heated tobacco.
The big risk here? Regulation. Smoking laws are tightening globally, and while the company’s evolving, the transition won’t be cheap — or guaranteed to succeed.
Phoenix Group
Second is a lesser-known dividend gem: Phoenix Group. The insurer, which owns names like Standard Life and SunLife, currently offers a jaw-dropping 8% dividend yield. That’s the kind of payout that could really boost returns from a passive income portfolio. It has 16 consecutive years of payouts and has grown them for the past 10.
However, it’s not all rosy. Phoenix is currently unprofitable, and neither earnings nor free cash flow cover the dividend right now. That doesn’t mean a cut’s imminent, but it’s a risk worth keeping in mind.
Land Securities Group
Last but not least, Land Securities Group (LSE: LAND), one of the UK’s biggest commercial property landlords and a classic real estate investment trust (REIT). Because of REIT regulations, Landsec’s required to return 90% of its profits to shareholders – hence the appealing 7% yield.
What’s more, it’s paid dividends for over 20 years with five consecutive years of growth. And with a payout ratio of 75%, the dividend seems well-covered and sustainable for now. It also has a solid balance sheet with a debt-to-equity (D/E) ratio of 0.7, meaning it’s not in any immediate risk of prioritising debt over dividends.
But be warned – property stocks can be highly cyclical. A downturn in the UK commercial real estate market could impact both earnings and the share price. This may be one reason the stock hasn’t grown at all in five years.
Slow and steady wins the race
These three stocks won’t shoot the lights out in terms of growth, but they’re designed for one thing: income. For anyone looking to build a passive income stream inside an ISA, they could be solid picks – especially for long-term investors willing to ride out the bumps.
A grand a month might not arrive overnight, but with consistency and time, it’s a target that’s well within reach.
