Due to the tax benefits offered with a Stocks and Shares ISA, owning stocks inside one of these wrappers can help investors generate a tax-free passive income. Indeed, this is a strategy I use myself.
However, it might not be suitable for all, as different investors may have different tax considerations or goals. Here are five passive income investments I’d buy for a Stocks and Shares ISA today.
Passive income investments
Owning income stocks such as Admiral and Direct Line could be one of the easiest ways to generate a passive income from the stock market. These equities currently offer dividend yields of 7% and 7.9% respectively, although these are just projections at this stage. There’s no guarantee either company will meet these forecasts.Â
Still, I like these companies because they provide a product, which is a legal requirement in the UK, car insurance. This gives them a huge market to sell in, although it’s also viciously competitive. It can be incredibly profitable for the market leaders such as Admiral and Direct Line. That’s why they’re dividend champions and why I have them in my portfolio.Â
The primary risks they face are competition, as noted above, as well as regulatory headwinds. A higher level of insurance claims could also destabilise their carefully-calibrated business models.
Stocks and Shares ISA holdings
Some of the market’s best passive income stocks are utility providers — companies such as United Utilities and Severn Trent.
These are some of the largest water businesses in the UK. As consumers will always need access to water, this is a relatively defensive market. And one that will always be there. All these companies have to do is manage regulatory demands and capital spending effectively to achieve the best balance of profit growth and investment.
At the time of writing, these companies support dividend yields of 4.8% and 4.4% respectively, based on analyst projections.
Unfortunately, they also have to deal with some significant challenges and risks, despite their defensive nature. For example, regulators control how much profit they’re allowed to make.
They also have a lot of debt, which means they’re exposed to interest rate increases. These factors could reduce their ability to produce a passive income stream for investors in the future.Â
Still, considering their defensive potential, I’d buy both United and Severn for my Stocks and Shares ISA.Â
Growth and income
One of the best ways to find a passive income stock is to buy and hold a growth investment. A company that’s reporting strong growth is more likely to increase its distribution to investors rapidly over the long term. Take generic drug producer Hikma, for example.
Over the past six years, this company’s per share dividend to investors has increased at a compound annual rate of 9%. Today, the dividend yield is 1.7%. While there’s no guarantee this dividend growth will continue, I think it shows its potential.
Hikma faces multiple risks, such as competition, regulation and the need to invest in its pipeline continually. If it doesn’t, competitors may overtake the business and leave it struggling to develop new products.
These challenges aside, I’d buy this company for a passive income portfolio in my Stocks and Shares ISA today.Â