Here’s how a £20,000 Stocks and Dividends ISA can one day generate £14,947 in annual income.
Image source: Getty Images
What makes a Stocks and Shares ISA a useful income generating vehicle?
Several things, in my opinion. As I explain below, in the right way, an ISA can end up providing powerful income streams.
Why bother with an ISA?
Some income ideas are wrong. Some don’t work at all, but involve a little work.
In contrast, investing in stocks of proven blue-chip companies that pay dividends with the spare cash they generate may provide passive income. i say “it is possibleBut by spreading the ISA across a range of different, carefully selected stocks, I think that risk can be managed.
However, that method does not require an ISA. A simple sharing account or trading app will suffice. However, the advantage of a Stocks and Shares ISA is that dividends can accumulate in it tax-free.
By taking a long-term approach, those can be reinvested (compounded) so that the gains end up producing more gains over time.
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.
Five figure income opportunities
As an example of how profitable this can be, say someone compounds their Shares and Shares ISA at 7% per annum. After 35 years, it should be large enough that the dividend yield of 7% is equal to £.14,947 income year.
That raises two questions though: why wait so long and is the 7% goal realistic?
A long-term approach can pay dividends
Waiting 35 years gives the compound enough time to make a real financial impact. That’s why the income is so amazing.
But you don’t have to wait 35 years. The same approach can work in the very short (or long) term. However, the income will vary accordingly, based on the time frame.
Hunting for high-quality stocks to buy
What about the target 7% annual growth rate and, subsequently, the dividend yield? (Besides, the difference is that the compound annual growth rate includes not only dividends but also any capital gains, less any capital losses). I see 7% is realistic.
One stock that I think investors should consider ITV (LSE: ITV). It aims to pay at least 5p per share in dividends every year. Currently, the share is trading for pennies, so its dividend yield is 6.1%. That means that for every £100 invested, the investor will hopefully earn £6.10 a year in dividends.
In addition to the income opportunity, I also see the potential for ITV’s share price to grow over time. That would be a change from what we have seen in recent years. Over the past five years, the stock has lost 31% of its value.
Such declines reflect an ever-worrying risk: the impact of growing digital competition and changing media consumption trends on legacy broadcasters.
I see that as a risk. But ITV’s legacy business remains a strong foundation for its business, even if it will decline over time.
The company has been developing its digital business as well. It also has a large production business that provides studio space and expertise. To me, the current share price does not measure the long-term value of that combination.
