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How realistic is it to try and use an ISA to withdraw income?
In my opinion, it would be really good. Some investors receive thousands of pounds a year in income in the form of dividends. Some get thousands each month.
But that doesn’t happen unless someone takes action to set the ball rolling!
So, how much of an ISA would someone need to target £2,000 a month of income?
Aiming for £2k per month
£2k a month works out to £24k a year. How much you need to be in an ISA to generate that level of tax-free income depends on the rate of interest earned.
At a 10% yield, for example, it would be £240k. Reverse the yield (up to 5%) and the amount needed doubles, to £480k.
Is the answer to simply find high-yield stocks?
That’s not the case. Dividends are never guaranteed and a smart investor will not only look at the current yield but also consider what the future yield of the share looks like. That may be based on the company’s financial outlook and other factors, such as its dividend policy.
That 5% is already much higher than the current one FTSE 100 2.9% yield, but I’ll use it here as an illustration. In today’s market, I see it as attainable even if I stick to blue-chip shares.
Using an ISA to your advantage
Few people have £480k sitting on a spare in an ISA!
Fortunately, this approach can be started from scratch and built up over time, using the ISA’s annual contribution allowances.
Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Let’s say someone contributes £20k a year to their ISA. Also imagine that they compound its value at 5% per year. That would be a combination of profits and capital growth, although a decline in share prices could also eat into value.
Doing so, the ISA would be worth £480k after 17 years. At a 5% yield, that would be enough to generate over £2k a month in average income.
Finding a low-cost Stocks and Shares ISA can also help, so it pays to take the time to compare options.
A share of money to consider
Where would you look to build an average yield of 5%?
One share that I think cash hunters should consider is FTSE 100 insurance Aviva (LSE: AV). It yields 5.5% and has been increasing its dividend each year since its 2020 low.
Insurance is an industry that has long benefited from strong demand. Aviva is the leading insurance company in the country by some distance. That gives it economies of scale and means it’s a big business.
But it also makes it vulnerable to smaller competitors trying to gain market share by undercutting it on price. That can hurt profits.
Still, I see a lot to like about the business.
The market is big and strong. Aviva has established a large customer base, has deep experience in underwriting and pricing and has been growing thanks to moves such as last year’s acquisition of rival Direct Line.
