Investing in a Stocks and Shares ISA is a brilliant way to generate passive income for retirement, because you don’t pay a penny of tax on the dividends.
The income comes from regular payments from stocks, such as FTSE 100 and FTSE 250 shares. The tax benefits come courtesy of the ISA wrapper. Combined, they make a great way to boost your spending power after you stop working.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Plenty of FTSE 100 stocks offer tempting yields. Legal & General pays 7.2%, LondonMetric Property 6.9% and Aberdeen Group 6.8%. But one currently beats them all. Ithaca Energy (LSE: ITH) has a stunning trailing yield of 10.72%.
What’s going on with Ithaca shares?
Ithaca may not be a familiar name. Established in 2004, it’s an independent oil and gas producer focused on the UK North Sea. It expanded through acquisitions and floated on the London Stock Exchange in November 2022. It hit the FTSE 100 on 21 September 2026. That’s good going in less than four years.
But the Ithaca share price has just suffered a major setback. It’s plunged around 18% in the past week, the FTSE 100’s worst performer.
The US midterm election results raised the prospect of a diplomatic settlement with Iran, potentially restoring disrupted oil supplies. Brent crude has since slipped below $95 a barrel. BP and Shell shares have also been hit, but Ithaca has been hit harder because it’s a relatively small, focused producer rather than a diversified energy giant. Is this a buying opportunity?
Latest results (19 August) were actually encouraging. First-half adjusted EBITDAX earnings hit $1.1bn, while operating cash flow was $1bn. Production hit a quarterly record of 131,000 barrels of oil equivalent a day. But that was when the oil price was flying. Things may not look so rosy if it continues to slide.
Can that dividend yield last?
Ithaca targets returning 30% of post-tax cash flow from operations to shareholders. That’s generous, but it also means dividends will rise and fall with energy prices. The stock is nonetheless forecast to yield 9.33% this year and 10% in 2027.
What about the shares? Nine broker forecasts produce an average one-year price target of 311p, up from 245p today. If correct, that’s growth of almost 27%. Obviously, none of that is guaranteed. Also, most of those forecasts will have been compiled before the latest sell-off.
Ithaca also faces hefty North Sea taxation, expensive development projects and production risks. It owns 20% of the Rosebank oil field, and is waiting to see whether this will get the green light. The UK government recently approved the Jackdaw gas field, but the Rosebank verdict will take a little longer – and will have a major impact on profits, dividends and the share price.
All told, Ithaca is very different from investing in, say, an established insurance company with a track record of regularly hiking dividends. Those seeking dependable retirement income should probably consider looking elsewhere. This FTSE 100 income stock yields 7% and has increased shareholder payouts every year for more than a decade…
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Harvey Jones owns shares in BP and Legal & General.
This story originally appeared on Motley Fool
