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UK adults can invest up to £20,000 a year inside a Stocks and Shares ISA and take all of their returns free of tax. It’s an astonishing benefit. It means no income tax, no dividend tax and no capital gains tax. For life.
That makes it a brilliant way to top up the State Pension, and other forms of retirement savings, while minimising what you owe to HMRC.
But that’s not the only thing a Stocks and Shares ISA can do. It can make relatively small initial sums grow into surprisingly large ones. Which can then be used to generate a second income in retirement. One that doesn’t just roll in regularly but should steadily climb over time, protecting against inflation.
How equities put your money to work
That’s what I’m doing. And I’m pursuing this goal by investing in a spread of FTSE 100 and FTSE 250 stocks, that offer both share price growth and potential dividend income too.
Stock markets can be volatile in the short run but over the longer term history shows they work your money harder than almost any other asset class. The key is to stay invested for decades, to give the miracle of compound growth time to work. While automatically re-investing every dividend you receive, to buy even more shares.
Over the last decade, the average Stocks and Shares ISA has grown at an annual rate of 9.64%, according to Unbiased. Let’s say an investor uses their full £20k allowance this year and leaves it invested for 30 years. At that rate of growth, it will be worth £316,301. Of that, a staggering £296,301 is sheer profit.
None of this is guaranteed. You may get a lower annual return. That said, you could get more. With a 5% yield, that £316k would produce income of £15,815 a year. Not a bad return from an initial £20k. Especially since it should increase over the years, as companies hike their dividends.
Just look at this FTSE 100 income stock
Some FTSE 100 stocks have a brilliant track record of increasing shareholder payouts, including tobacco cigarette maker British American Tobacco (LSE: BATS). It’s hiked dividends for 28 years in a row.
Today, it has a generous trailing dividend yield of 5.34%. The British American Tobacco share price has done pretty well too. It’s up almost 75% in the last five years. While the shares has slowed a little lately, they’re still up almost 15% over the last 12 months.
Tobacco stocks come with moral and regulatory dilemmas. Some won’t want to invest in them at all, which is fine, because there are plenty more terrific dividend-paying blue-chips to choose from.
Those who are fine with ‘Big Tobacco’ must understand the risks. Smoking continue to decline, the industry is a target for class action lawsuits, and the backlash against vaping is likely to grow.
Despite that, I think British American Tobacco is worth considering, as part of a balanced portfolio of at least a dozen UK stocks. Don’t just invest £20k though. The more you put into a Stocks and Shares ISA, the more wealth and income you’ll have when you retire.
Should you invest £5,000 in British American Tobacco P.l.c. right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if British American Tobacco P.l.c. made the list?
Harvey Jones does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
