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A Stocks and Shares ISA currently has an annual contribution limit of £20,000 per annum. However, it’s not always realistic for an investor to max out the allocation each year, for a variety of reasons. Yet, over time, an ISA portfolio can be built up to help achieve goals, such as generating a second income. Here are some of the numbers I crunched based on a £50,000 portfolio size.
Setting realistic targets
To begin with, a £50,000 ISA can’t be achieved overnight. Even if an investor could afford to invest the full £20,000 each year, it would still take a few years to reach the mark. Yet, this isn’t a big problem. Patience when it comes to investing is a valuable trait to cultivate. Therefore, a steady allocation to stocks each month can be used to build up the passive income.
Another positive from doing it this way is that the person doesn’t have to try and buy dividend shares with very high yields, which can carry high risk. Rather, they can still be active in stock picking to get a higher dividend yield than average. But there’s a sweetspot to be had where risk and reward can be balanced. I believe this is in the 5%-7% yield range.
If we assumed an investor could put £400 a month in dividend shares with an average yield of 6%, the ISA could reach the £50,000 goal just after eight years. From here, the £50,000 could potentially generate £3,000 a year in passive income. Of course, this is with the 6% yield assumption. The actual yield could be higher or lower, meaning that the income received would vary, too.
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A stock for conversation
Within the ISA, I think it would be a smart move to include dividend shares that are sustainable in nature. After all, it’s a hassle having to reguarly buy and sell stocks if the dividend frequently is getting cut. One idea with a good track record is the MONY Group (LSE:MON). The business has been paying out a constant dividend for almost two decades. The current dividend yield is 5.98%, with the stock up 1% in the last year.
At its core, the company is an online consumer savings and comparison site. It has brands, led by Moneysupermarket.com, including MoneySavingExpert, designed to help people get the best deals on products like insurance. The company makes money by selling advertising space, getting commissions from prodivers, and some membership schemes.
It benefits from having low debt and limited overhead costs. This means that financially, it has good cash flow, a key element when it comes to paying out income over time. Over the years, it has built up a loyal customer base, which means client retention is high. Again, this is a positive for dividend investors, as predictable demand should lead to predictable dividends.
One risk I see is the emergence of AI. Even though it’s trying to integrate it to the customer experience, new AI bots can do a lot of the work from the comparison site, reducing the need for customers to engage with it. This could be an issue in the future.
Despite this, I think it’s a stock to consider for investors looking to pursue this strategy.
This story originally appeared on Motley Fool
