Just one year’s Stocks and Shares ISA allowance can generate an annual income of £1,900. Here’s the way!
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With the annual contribution deadline for the Stocks and Shares ISA just a few weeks away, now is as good a time as any to think about different ways to use an ISA.
Another option would be to try to generate income. With ISA tax-free benefits, money invested in it now can generate streams of income, tax-free, for decades to come.
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.
Choose your number!
In this example, I’ll assume that someone wants to invest a typical annual contribution allowance of £20k and target an annual income of £1,900.
In fact, the same approach can work with a smaller investment in a Stocks and Shares ISA – or an even bigger income goal. But it would take a long time all the same.
Finding the right ISA
One thing that can eat into those revenue streams are fees, commissions, and other costs charged by the investment platform provider.
Therefore, it makes sense to shop around and choose the right Stocks and Shares ISA.
£20,000 is used to target £1,900 per year
£1,900 is 9.5% of £20k. No FTSE 100 the share yields 9.5%.
So, is it a realistic goal?
I think so, for someone willing to take a long-term approach to investing.
Imagine someone invests £20k in a diversified portfolio, which returns 6.5%, and starts compounding (reinvesting) those dividends. (Doing this in a Stocks and Shares ISA should mean big gains, and dividends, are tax-free).
After seven years, the ISA should be large enough that a dividend yield of 6.5% will produce more than £1,900 a year in passive income in the form of dividends.
It turns on the faucets of income
One share that I think investors should consider for their income potential is the FTSE 100 financial services provider Legal & General (LSE: LGEN).
The company aims to increase its profit gradually by 2% per year.
That may not sound like much and is less than the 5% a year the company was managing a few years ago.
But it is already the highest-yielding share in the blue-chip index of leading stocks, yielding 8.8%. At a time when the yield on the FTSE 100 is not a third of that, at 3%, Legal & General’s sugary payout is attracting attention.
Can it last?
Last week the company also increased its annual dividend. In the short term that’s good news. However, in the long term, earnings have not returned to their level of the past few years and sales of large US businesses will eat into revenues.
Another risk is volatile financial markets that result in policyholders cashing out. That can hurt cash flow. It’s no coincidence that Legal & General last cut its dividend during the 2008 stock market turmoil.
Still, the company is profitable and consistently generating cash. The US sale brought in a huge amount of money. The core business continues to benefit from continued demand, a large customer base, and a proven business model.
No dividend is ever guaranteed, but I see Legal & General as a worthwhile stock for investors.
