Stock market

How I want to earn £16,100 in passive income in a year by investing £20k in a stocks and shares ISA

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FTSE 100 Stocks are a great way to generate the passive income I need to fund my retirement, as they pay some of the most generous dividends in the world.

By investing in a stocks and shares ISA, I can take this income completely tax-free (as well as any share price appreciation).

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content in this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any tax advice. Readers are responsible for doing their own due diligence and seeking professional advice before making any investment decision.

Dividend income

Each adult can invest up to £20,000 in an ISA each year. If I could afford to invest the entire amount in a selection of high-yielding UK dividend shares, I would reap huge rewards in terms of income.

I’ve spent the last year snapping up UK income stocks and it’s starting to pay off. On May 9, M&G Paid £408.27 into my online trading account. next day, Taylor Wempe Please send me £158.78.

On May 21, Lloyds Banking Group £172.09 sent, while next day Phoenix Group Holdings Paid £137.24. More will follow, as other companies do their thing.

I’m keen to buy another dividend hero and a China-focused bank. HSBC Holdings (LSE: HSBA ) has been on my watch list for some time.

My favorite type of dividend stock combines high yield with low cost, and that’s what HSBC does these days. Incredibly, it trades at just 6.69 times forecast earnings, despite a 15.53% increase in share price over the last year.

Even more impressively, it has a forecast 9.39% yield in 2024. This is a fantastic rate of return. If it comes through, it is. Profits are never guaranteed and are huge.

With luck it should be, as HSBC makes a pile of cash. Full-year 2023 profit before tax rose 78% to $30.3 billion as revenue increased and higher interest rates boosted margins.

This allowed the board to approve a fourth interim dividend of 31 US cents per share, bringing the full-year dividend to 61 cents, the highest since the financial crisis. It delighted investors with $7 billion in share buybacks and is raising another $2 billion in the first quarter.

FTSE 100 Dividend Star

2024 may not be such a bumper year. When interest rates start to fall, margins may shrink. There is also the underlying concern that HSBC could be squeezed by the US-China superpower stand-off, forcing it to choose sides.

Every stock has risks. That’s why I invest in their spread. By topping up my existing dividend stock holdings and adding HSBC, I think I could generate an average yield of around 8%. This would give me an income of £1,600 in the first year, with capital growth from rising share prices.

This is just the beginning. With luck, that income will grow over time, as my chosen companies grow profits and increase profits.

Let’s be very careful here and say I don’t generate a penny in capital growth, but just reinvest all my profits. After 30 years, my £20k would have grown tenfold to £201,253. With this 8% yield, I would generate an income of £16,100 per annum. Which isn’t bad for an initial £20,000 investment.

If I also get capital growth, I can get a lot of passive income from it. Fingers crossed!

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