A Stocks and Shares ISA is an excellent way to target a passive income. A £20,000 annual allowance gives your plenty of financial firepower to target life-changing wealth. And every penny of your dividends, capital gains and withdrawals is protected from the taxman.
Could you imagine having an extra £3,000 in your bank account each month? With the future of the State Pension’s ‘Triple Lock’ looking uncertain, targeting an additional second income for retirement may be critical. With the help of the ISA, it doesn’t have to be a pipe dream.
Let me show you how.
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.
Rule of 4
A monthly second income of £3,000 translates to £36,000 a year. That’s a decent lump of cash to reach your financial goals in retirement with.
Yet the exact amount you’ll need in your Stocks and Shares ISA to hit that £3k target isn’t set in stone. The reason? Once you retire, there are multiple ways you can turn your ISA cash into a passive income.
One of the simplest and most popular ways is to withdraw a certain percentage of your portfolio’s capital, typically 4%. At this level, you can typically expect 25-30 years of income before the well runs dry. And to achieve a £3,000 a month income, you’d need an ISA worth £900,000.
Reducing that ISA burden
At this point, let me put my cards on the table. This isn’t the income strategy I expect to use when I eventually retire. My plan is to invest instead in high-yield dividend shares that generate a steady flow of cash.
The reasons are twofold. If I invest in dividend stocks, I hopefully won’t need anywhere near as much cash in my portfolio when I retire. This approach also doesn’t require me to draw down capital which gives my portfolio further room for growth.
Now let’s crunch the numbers again. If I do decide to invest in dividend stocks in retirement, and more specifically target shares with 6% yields, I’ll need a far smaller £600,000 Stocks and Shares ISA to hit my £3,000 target.
An 8% income opportunity?
The one drawback to this approach is that dividends are never, ever guaranteed. However, there are typically hundreds of robust, high-yield dividend stocks investors can choose from at any one time. A diversified portfolio of 20-30 of them could realistically deliver a steady second income in retirement.
I’ll give you one example: Primary Health Properties (LSE:PHP), a share I’ve held in my portfolio for years and is worth considering now. It’s raised annual dividends without fail for roughly 30 years. And it’s provided sky-high yields in that time too.
Today Primary Health’s dividend yield is 8% for this year. It marches to 8.2% for 2027, and to 8.4% for the following year, reflecting City forecasts of further growth.
There’s are multiple reasons why Primary Health is such a dividend champion. Focusing on the defensive medical sector is one. Having government-backed contracts is another, as is linking its rental agreements to the rate of inflation. Rising interest rates could impact dividends near term, but looking long term I’m expecting the trust to remain a reliable and generous dividend payer.
I think Stocks and Shares ISA investors should consider the dividend hero discussed below, too.
What income stock do we like better than Primary Health Properties 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.
Royston Wild owns shares in Primary Health Properties.
This story originally appeared on Motley Fool
