How I’d invest a £20k ISA to target £1,500 a year in passive income

Passive income is the holy grail for many investors, myself included. This can be achieved by investing in dividend stocks that pay shareholders in regular installments. However, it should be noted that dividends are not guaranteed.

So today, I’m looking at how much passive income I can realistically make from £20,000 – a year’s maximum ISA allowance.

‘Realistic’ is the operative word here. There are some double dividend yields, but history shows that these are generally unsustainable.

However, I need to see guaranteed results and a company with a strong business. So let’s find some companies that can help me earn £20,000 on £1,500 a year.

Spread the risk

I don’t want to put all my eggs in one basket. But, equally, when investing in stocks and shares, I need to do my research. I don’t want to distribute it myself because I might struggle to keep up with all the research and development around the stocks I have.

So, I’m going to split the £20,000 four or five ways. I know other investors will be looking for 10 stocks or more. But personally, I like to feel like I’m in control. In fact, I recently sold some of my small holdings.

To earn £1,500 a year from £20,000, I need to invest in a company that offers an average dividend yield of 7.5%. That is some distance above the average, but it is very achievable. So, there are a few companies that I will buy to achieve my goals.

One company I bought was Chemical and Mining Society of Chile. I recently added a Chilean lithium miner to my portfolio due to its upside potential and 7.8% dividend yield.

Stocks remain our top pick Scotiabank and many analysts still suggest that the miner is undervalued, despite its sharp rise over the past 18 months.

It is quite dependent on lithium profits, and that can be seen as a risk, especially in the middle of the global economic slowdown. But increasingly precious metals are a key component of the electrification agenda.

Rising dividends

Legal & General it’s another option. I have this portfolio, but I will buy more. The company established a dividend policy in 2020 for the next five years, promising to increase 5% annually in total dividends.

The blue-chip stock currently offers a dividend yield of 7.5% and, at last count, having a range of around 1.85 – 2.0 would be much healthier.

In November, the company told the market it expected full-year operating profit and return on capital in line with its guidance. There are no signs that dividends may be in danger despite concerns about the UK economy.

Another option is a life insurance specialist The Phoenix Group. pays 7.7% dividend per last share and yields an annual dividend of 7.7%. The company buys and manages closed-end life insurance and pension funds for new and managed businesses. Not very exciting, but the company is well run.

Both stocks are likely to suffer amid a faltering UK economy due to weak demand for financial services. But overall, I think the risk has been priced in, and the long-term outlook is positive. I also recently bought shares of Phoenix Group.