How I’d invest a £10K in an ISA to earn £60 a month passive income

As the banking crisis rumbles on, I’m keen to take advantage by loading up on high-yielding FTSE 100 stocks to generate a regular passive income.

The index is packed full of top dividend-payers at the best of times, so what makes today particularly attractive? It’s all about the yield.

As shares fall, yields rise

Yield is calculated by dividing the dividend per share by the share price. So if the share price falls, I get more passive income.

As the crisis rolls on, shares are falling all over the FTSE 100 and not just banking stocks. Most now offer higher yields as a result. Let’s take just one example, Legal and General Group. Last Friday it was yielding 7.41%. Today, I’d get 8.54%. 

Yet L&G has nothing to do with the banking crisis. It isn’t even a bank. The FTSE 100 is full of companies in a similar position. Let’s say I invested £10,000 in a tax-free Stocks and Shares ISA. I wouldn’t put it all into one stock, instead, I’d split it between five different companies in five different sectors.

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.

Diversifying will reduce my risk if one of the companies flops, or a particular sector finds the going tough over the next year. Banking, for example.

If I started by investing £2,000 of my £10,000 into L&G, its 8.54% yield would give me income of £170.80 a year. 

I fancy a house builder, because their shares have sold off as investors flee a potential house price crash. I suspect the selling may have been overdone. Barratt Developments yields 8.48% today. If I put £2,000 into that I’d get income of £169.60 a year.

I might then diversify into the mining sector, by purchasing shares in Anglo American, which currently yields 6.76%. My £2,000 stake would generate income of £135.20.

I’d reinvest my dividends at first

Adding tobacco maker British American Tobacco, which yields 7.34%, would generate another £146.80. Buying troubled telecoms giant BT Group with my final £2,000 chunk would give me £105 courtesy of its 5.25% yield.

As a general rule, higher yield equals higher risk. I would need to explore all of my stock picks’ company accounts in greater detail before parting with my money.

All five are available at dirt-cheap valuations, which is both tempting and a warning signal. Share prices don’t fall for no reason. If a company doesn’t generate the cash flows required to maintain shareholder payouts, it doesn’t matter how much they yield on day one. Dividends can be cut at any time.

My £10,000 would generate total income of £727.48 in the first year. That’s £60.61 a month. With a fair wind this will be a rising income, as most FTSE 100 companies aim to increase their dividends over time.

I will reinvest all my dividends today and take them as passive income when I retire. Hopefully, the income will be a lot higher by then.