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  • February 14, 2025
€5,000 in savings? Here’s a passive income ISA plan to consider

€5,000 in savings? Here’s a passive income ISA plan to consider

€5,000 in savings? Here’s a passive income ISA plan to consider

Image source: Getty Images

Top Cash ISA rates are ahead of inflation, which can make them seem attractive for earning passive income.

I can’t beat anyone using one now. It’s important to try to protect the money we have from price rises, and a Cash ISA can do that today.

It’s a good time to remind ourselves how helpful it can be to save some money to cover any emergencies. And if we can stay ahead of inflation, that’s a bonus.

But Cash ISAs won’t remain as attractive if Bank of England rates fall.

Long-term income

The most successful ISA investors keep some of their money in cash. But it’s a smaller share than most.

That is not surprising, according to research by Barclays found that the UK stock market generates an average annual return around 4.9% above inflation. That’s more than a century and more, and some years show poor results.

For example, in the year 2019-2020 Stocks and Shares ISAs lost an average of 13.3%. Cash ISAs came out ahead by a wide margin that year.

To maximize our hopes for long-term passive income, we definitely need to take on a little more risk. But a careful approach to ISA investing can help manage that risk.

A single stock

I would never put all my money into one stock, but let’s take a look as an example National network (LSE: NG.).

I like the predicted dividend yield, currently at 5.7%. That alone is better than even the current top Cash ISA rates, regardless of any potential rate increases.

That said, a dividend can never be guaranteed like cash interest. But in the long term, I see the National Grid dividend coming out well.

Still risky

From that graph we can see that there is a risk of share price declines. In May this year, National Grid shocked the market by raising fresh capital, which has set the market back.

I think National Grid could also see a bit more volatility in the near term. But I like the look of those dividends.

I use investment funds as protection against short-term shocks like this. They spread their money across a wide range of investments, reducing the risk of a specific company or sector.

I think the Association of Investment Companies’ Dividend Heroes list has some good ones to consider. They use a number of different strategies, but they have one thing in common. All have increased their dividends for at least 20 years in a row, while the leaders have done so for more than 50 years.

Diversify

Even an investment fund can have a bad year, you know. So it’s all about diversification.

The more we can diversify across different industries, the safer we should be in the long run. We can still expect downturns, such as during the 2020 stock market crash. But most of that year’s losers have already recovered and made gains.

So spread my money around dividend stocks with past records of consistent annual increases. That’s what I do with every £5,000 I have to invest.

And then I add as much extra as possible every year.