These 5 stocks could earn £1,600 of annual passive income in a £20,000 ISA

When it comes to building passive income, I think the UK stock market is one of the best places in the world to start. 

With so many FTSE 100 companies offering chunky dividend yields right now, it’s possible to build a decent second income from just one year’s Stocks and Shares ISA allowance.

If an investor was to split £20,000 evenly between five dividend-paying shares, here’s what the numbers could look like.

I’ve deliberately chosen companies from five different sectors. Combined, they give an average yield of almost bang on 8%.

High-yielding FTSE 100 stocks

That means a £20,000 ISA split equally across those five stocks could generate around £1,600 in dividend income in the first year alone. And because the investments sit within an ISA, that’s all 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, dividends are never guaranteed. Companies can reduce or cancel shareholder payouts at any time. And these yields are so high partly because share prices have been knocked down by recent stock market volatility, sparked by President Donald Trump’s tariff threats.

Mining giant Rio Tinto (LSE: RIO) has seen its share price fall 10% over the past month and is down 9% over the past year. 

For years, Rio Tinto rode the wave of China’s growth story. At its peak, China accounted for around 60% of global demand for key commodities like iron ore, which is Rio’s bread and butter.

But the slowing Chinese economy and property market meltdown have hit demand for industrial metals. Now Trump looks to be dragging China into a full-blown trade war, potentially making things worse.

In February, Rio Tinto posted its weakest earnings in five years. Underlying earnings fell to $10.87bn, missing expectations, while iron ore profits dropped 19% year on year. 

Earnings per share came in at $6.70, below the $6.80 forecast. 

On the plus side, its aluminium division did well, with a 61% profit jump, and the final dividend of $2.25 was in line with forecasts.

Potential capital growth as well

As a result, the shares look attractively priced, trading at just 8.6 times earnings. That’s roughly half of what many would consider fair value. 

In the longer run, the shift to cleaner energy and electrification should support demand for copper, lithium, and other metals Rio produces.

That’s why I believe Rio could still have a place in a diversified income portfolio.

Diversification is key. No single company is bulletproof, but spreading an investment across several sectors, as I have done in the above table, reduces exposure to any one company- or sector-specific risk.

Generating £1,600 worth of dividend income in year one of a £20,000 ISA is nothing to sniff at. Especially since any capital growth is on top. If an investor reinvested every dividend back into their portfolio, it could really grow into something meaningful. 

For anyone keen to build generate a passive income, this year’s Stocks and Shares ISA may be a good place to start.

The post These 5 stocks could earn £1,600 of annual passive income in a £20,000 ISA appeared first on The Motley Fool UK.

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Harvey Jones has positions in Bp P.l.c., Phoenix Group Plc, and Taylor Wimpey Plc. The Motley Fool UK has recommended British American Tobacco P.l.c. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.