How much of a Stocks and Shares ISA is needed to get a monthly income of £500?
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The idea of getting income from a Stocks and Dividends ISA is very simple. Many large, successful companies pay their shareholders money in the form of dividends. So by investing the ISA in a mix of high quality dividend stocks, it should be possible to get a regular passive income.
As with any income plan, there may be bumps along the way. No dividend is guaranteed to last forever. That is why such a plan aims to diversify into different companies and always pay close attention to the quality of each investment.
But in the right way I think a Stocks and Dividends ISA can be turned into an income capital!
Income formula
How much depends on a few basic factors: the amount invested and the profit margin. The yield is basically how much a person gets per year in dividends, expressed as a percentage of what he paid for his shares.
The yield is not limited, as the dividends are not guaranteed. But it’s not always bad news: the dividend can be cut, but it can also grow. Others FTSE 100 firms that have grown their dividend every year for decades.
Currently, the FTSE 100 is yielding 2.9%. But I think a higher yield of 5% is possible, while sticking to proven blue-chip companies.
£500 a month adds up to £6k a year in income. At a 5% yield, that would require a Stocks and Dividends ISA worth £120k.
But it is possible to start with very little – in fact zero. Putting in £20k a year and compounding it at 5% a year, the ISA will be worth over £120k after six years. With a 5% yield, the ISA should be more than capable of hitting a target income of £500 a month, on average.
Choosing an ISA
For most investors, £20k is within the annual contribution limit for a Stocks and Shares ISA.
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.
Different ISAs have their own payment structures. Those can eat into returns, so it’s important to take the time to compare the options when choosing a Stocks and Shares ISA.
Is it possible for this budget allocation to be reversed?
One share that I think investors should consider is its income potential Pets at Home (LSE: ANIMALS). It currently yields 6.3%. Share price performance has been worse, down 49 percent over the past five years.
That is partly down to the challenges of getting the right product selection on the shelf at an attractive price. I realize that ongoing risk management may not be that good.
But a trading update this week helped boost investor sentiment. The most recent quarter still saw retail revenue decline, but there were early signs that the company sacrificing profit margins to make prices more competitive may be starting to improve sales.
Meanwhile, not only was the news of the retail business encouraging, but FTSE 250 The company has a large and growing chain of veterinary practices. That division generated revenue growth of 5% year-over-year in the quarter.
The company benefits from a large customer base and has an active loyalty program that I think can help keep them coming back for more.
