Here’s How To Invest £5,000 In An Isa For A £700 Passive Income

Using an ISA to earn a passive income in the stock market is a fantastic idea, in my opinion. Apart from leveraging one of the greatest wealth-building tools, ISAs allow investors to grow their wealth and earn an income entirely tax-free.

What’s more, even with a relatively small lump sum of £5,000, it’s possible to start earning a decent annual payout of £700. That’s a 14% yield, far more than what even the most generous Cash ISAs offer today. Here’s how.

Turning £5,000 into £700 a year

After generating some superb returns in 2025, the FTSE 100 index currently only offers a yield of around 2.9%. The FTSE 250 is a bit more generous at 3.3%, but that too still falls short of the target 14%. For reference, in terms of money, at these rates, relying on index funds would only generate a £145-£165 annual passive income.

To aim higher, investors have to turn to a stock-picking strategy. That way, they can invest in the specific companies that offer much higher yields… like FDM Group (LSE:FDM) with its 14.3% payout â enough to generate £715 each year overnight.

Yield versus risk

As a quick introduction, FDM’s a consultancy group focused primarily on the IT sector. When businesses launch complex projects, FDM offers a helping hand by sending talented professionals to assist with their implementation, design, and execution.

The only trouble is, in recent years, with most businesses cutting back on non-critical spending, demand for its services has suffered considerably, with less than half the number of consultants deployed today versus four years ago.

Consequently, revenues and cash flows have collapsed along with its share price. And consequently, despite seemingly offering a substantial yield, a dividend cut has already been announced.

Put simply, FDM Group’s a perfect example of a yield trap.

A better strategy?

However, looking ahead, FDM’s fortunes could improve. IT consulting is ultimately a cyclical enterprise, and with over 30 years’ experience, the company’s no stranger to navigating tough downturns. The fact that management’s prepared the balance sheet to be cash-rich and debt-free supports this even further.

But what about the goal of earning a 14% yield? Companies like FDM with enormous payouts almost always come with extreme levels of risk. Therefore, in my experience, a far more effective and lower-risk strategy is to find the companies that may not have a high yield today, but can continuously grow their dividend over time.

A perfect recent example of this would be Safestore (LSE:SAFE). By generating consistent and recurring cash flows from renting extra storage space to businesses and consumers alike, earnings have been steadily compounding over the years.

The result has been 15 years of consecutive dividend hikes. And that means anyone who invested £5,000 in 2011 isn’t earning a 14% yield today but rather a 22.8% yield, enough to generate £1,140 passive income.

Like FDM, Safestore still has its risks. Self-storage demand’s similarly cyclical and heavily tied to the home renovation market, which isn’t exactly thriving right now.

Nevertheless, the business continues to generate reliable cash flows from a service that seems likely to stick around for several more decades. So for investors seeking to earn a substantial long-term passive income, Safestore shares could be worth investigating further.

The post Here’s how to invest £5,000 in an ISA for a £700 passive income appeared first on The Motley Fool UK.

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Zaven Boyrazian has positions in Safestore Plc. The Motley Fool UK has recommended Safestore Plc. 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.