How does £1,000 in dividends every month from a Stocks and Shares ISA sound? To most people, such a sum would definitely come in handy.
The good news is that the maths shows us this target is entirely achievable, assuming someone is consistent and patient. Here, I’ll show how large an ISA would need to be to throw off a grand a month in tax-free passive income.
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.
What return to target?
Industry data shows that Stocks and Shares ISA investors show a home bias. In other words, while the London Stock Exchange only represents about 3.6% of total global stock market capitalisation, UK investors hold significantly more than that.
To give a fairer representation of the sort of return an ISA investor might expect then, I’ll use the FTSE 100‘s historical average rather than higher US returns. Over the past decade, this has been roughly 9%, with dividends reinvested.
But hang on, some may now be thinking, isn’t this about generating income rather than reinvesting it? Fair point, but the reality is that the annual ISA allowance is £20,000, so even if you were to generate an 8% yield, this would total ‘just’ £1,600 a year. That’s far below our target.
So it’s going to take time to build an ISA, and reinvesting dividends helps speed up this process.
What yield to aim for?
The average dividend yield of the FTSE 100 is currently a smidgeon over 3%. But with plenty of high-yield options to choose from, I think it’s realistic to aim for a 5% yield from a diversified portfolio of shares.
This last point is crucial because a well-rounded ISA (15-25 stocks) reduces the impact of individual dividend cuts, which can’t be ruled out. It certainly helps you sleep better at night knowing your portfolio isn’t concentrated in a small handful of companies.
Assuming someone can afford to invest £833 a month — the equivalent of £10,000 a year — we now have all the ingredients to know it would take roughly 13 years to reach our target.
A booming bank stock
Turning to Footsie dividend stocks to consider, NatWest (LSE:NWG) strikes me a solid contender. The Royal Bank of Scotland owner, which has more than 20m UK customers, is yielding 5.5% on a forward-looking basis. So it’s well above the FTSE 100 average.
Moreover, this prospective payout is covered two times by expected earnings, offering a decent margin of safety. And despite the share price rocketing 211% in five years, the valuation doesn’t look overstretched.
In the first half, the bank’s earnings per share jumped 23.3% to 38.1p, beating market expectations. And full-year return on tangible equity, a key measure of banking profitability, is now expected to be greater than 19% (up from 17% previously).
NatWest is accelerating share buybacks while scaling its wealth management business following the £2.7bn acquisition of Evelyn Partners. The lender’s also using AI to be drive greater efficiency.
But will Andy Burnham’s government target banking profits to pay for his social care plans? With welfare cuts and income tax rises seemingly unpalatable to Labour backbenchers, this can’t be ruled out.
Despite this risk, I think NatWest stock’s worth considering, especially with interest rates set to stay higher for longer.
What income stock do we like better than NatWest Group Plc right now?
One of our Share Advisor analysts has just released a brand new stock report that we think is a must-read for any investor looking to try and generate potential income.
And the best bit is that you can see if for yourself, right now, absolutely free of charge!
No jargon. No hard sell. Just a clear look at an income share we think is worth your time.
Ben McPoland has no position in any of the companies mentioned.
This story originally appeared on Motley Fool
