Image source: Getty Images
£1,000 in passive income a month would be nice, wouldn’t it? Imagine the financial flexibility that kind of cash flow could provide. Interested in building an ISA that churns out this level of income every month? Here’s a four-step blueprint to get started.
Choosing the right ISA
You can create a passive income machine with either a Cash ISA or a Stocks and Shares ISA. But It’s far easier with the latter.
With a Cash ISA, you’re restricted to earning bank interest (and a slave to UK interest rates). With a Stocks and Shares ISA, however, you have access to a range of income-producing investments such as dividend stocks, income funds, and investment trusts.
These kinds of investments have far more potential when it comes to generating cash flow. For example, some stocks on the London Stock Exchange have dividend yields of 8% today.
Making regular contributions
Once you have an ISA open, the next step is to contribute religiously – and invest – to build up a pile of capital.
How much do you need to generate £1,000 income a month? That depends on the average yield you’re trying to achieve.
But let’s say you were aiming for a 6% yield, which I think is achievable (without taking on too much risk). That would require capital of £200,000 (6% of £200k is £12k).
Building capital
It’s worth noting that to build up your capital, you don’t necessarily have to invest in dividend stocks or income funds. It could be faster to get to your target with a selection of growth stocks.
These can be a bit more volatile at times, meaning the path to your financial goal may not be linear. But in the long run, they can provide higher returns than dividend stocks.
A good example here is Amazon (NASDAQ: AMZN). Over the last 10 years, it has returned about 25% a year (with plenty of volatility along the way).
That’s a brilliant return. And it’s a higher return than most high-yield dividend stocks have delivered.
How has the company managed to generate such high returns for investors? Well, it’s all about the growth.
Since 2015, Amazon’s revenues have climbed from $107bn to $638bn. Meanwhile, operating profit has jumped from $2.2bn to $66.8bn. This growth has pushed the share price up significantly.
Of course, past performance isn’t an indicator of future returns. But I think the stock is worth considering today as part of a diversified portfolio (it’s one of my largest holdings), given its exposure to growth industries such as e-commerce, cloud computing, digital advertising, and space broadband.
Economic weakness and competition from rivals are risk factors. But all things considered, I think there’s a lot of potential.
Investing for income
Once £200k had been acquired, the final step would be spreading the capital out over a range of dividend stocks or income funds to produce the income required. By taking a diversified approach, one could create a steady stream of income without the risk of a major loss of capital.
Owning a range of stocks and/or products would also help spread out the timing of the cash flow. With some planning, an investor could construct a portfolio that pays a decent amount of income on a monthly basis.
