How much would someone need in a Stocks and Shares ISA to tip a second monthly income of £1,667?
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With all the dividends and capital growth achieved tax-free, a Stocks and Shares ISA is likely to grow faster than other investment products. And with some patience and discipline, I think it’s possible to use one to earn a great second income, starting with a relatively small amount. Let me explain.
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One way
If someone had an ISA worth £500,000 and earned a 4% annual return on a portfolio of equities, they would be able to generate £20,000 a year, or £1,667 a month.
I agree that half a million pounds sounds like a lot of money. In fact, it’s a lot of money. But if someone starting with £1,000 was able to supplement this with a monthly investment of £100, they could get there reasonably quickly with an effective stock-picking strategy.
For example, they could achieve an annual growth rate of 15.3%, it would take 26.5 years to build an investment pot of more than £500,000. Someone who starts in their 20s can have an impressive nest egg by their late 50s. At this point, they may choose to shift focus and use dividend stocks to create a secondary income stream.
Is this really possible? In theory, yes.
Something to consider
Take it MP Evans Group (LSE:MPE), an Indonesian palm oil producer, for example. Since April 2021, it has experienced an average increase of 15.3% in its share price. This does not include any benefit from buying additional shares using the group’s dividend. The stock is currently (April 2) yielding 4%.
Of course, capital growth and dividends cannot be guaranteed. Indeed, the size of an MP Evans plant depends on the climate and how effective it is at controlling pests and diseases. And the price of its oil is determined by international markets, which can fluctuate.
However, the group has a good track record of overcoming these challenges and – thanks to a 396% increase in earnings per share – has seen its dividends grow by 65% since 2012. Last year, it declared a dividend of 60p.
| Fiscal year | The dividend (pence) |
|---|---|
| 2012 | 8.00 |
| 2013 | 8.25 |
| 2014 | 8.25 |
| 2015 | 8.75 |
| 2016 | 15.00 |
| 2017 | 17.75 |
| 2018 | 17.75 |
| 2019 | 17.75 |
| 2020 | 22.00 |
| 2021 | 35.00 |
| 2022 | 42.50 |
| 2023 | 45.00 |
| 2024 | 52.50 |
| 2025 | 60.00 |
And I see no reason why this should not continue.
Hopes are strong
The global market for palm oil – the world’s most traded vegetable oil – is currently worth around $70bn. And it is predicted to grow exponentially in the next 10 years.
| Organization | Global palm oil market forecast to 2035 ($bn) |
|---|---|
| Grand View Research | 114.0 |
| Future Market Insight | 119.1 |
| The Future of Market Research | 129.8 |
To benefit, the group continues to plant more hectares. It also emphasizes the sustainable nature of its products and works with local co-ops to maintain good relationships.
However, despite its above-average dividend and strong recent price performance, the stock is flying under the radar. With an attractive 2025 earnings multiple of 9.2, I think the market has not yet priced its full potential.
Of course, it would not make sense to have a portfolio of just one stock. But I think MP Evans could be considered by an investor who wants to build long-term wealth – using a Dividends and Shares ISA – with the aim of retaining capital gains.
One example is a UK listed company that runs its business quietly and consistently delivers above average shareholder returns.
