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Looking to generate a second income stream for retirement? Investing in dividend-paying FTSE 100 companies via a Stocks and Shares ISA is a terrific way to do just that. Dividends and capital gains grow free of UK tax inside an ISA, while withdrawals are tax-free too.
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.
Let’s say an investor wants to generate a passive income of £2,225 a month. That’s a meaty £26,700 a year, more than twice the size as the full State Pension, currently £12,547. Worth having.
Using the traditional 4% withdrawal rule, our investor would need a £667,500 portfolio to generate that amount. It’s a hefty target, but regular investing and the magic of compound returns can make it doable.
Tax-free growth and income
Suppose someone invests £455 a month in a diversified portfolio of FTSE 100 and FTSE 250 shares, earning an average annual return of 8%, with dividends reinvested. At that rate, they’d have £667,000 after 30 years.
There’s no guarantee of an 8% return as markets fluctuate, and investors can lose money. But starting early, investing regularly and reinvesting dividends can make a remarkable difference over time.
One stock worth considering is FTSE 100 bank NatWest (LSE: NWG). Its shares have climbed a stunning 200% over three years with dividends on top.
Higher interest rates have helped banks widen their net interest margins, while stronger lending, rising profits and generous share buybacks have attracted investors. NatWest’s 2025 pre-tax operating profit rose 24% to a meaty £7.7bn.
As a result of the share price growth, the trailing dividend yield has eased to around 5.1%. However, analysts forecast a yield of 5.6% in 2026 rising to 6.1% in 2027. With luck, it’ll keep growing after that. NatWest’s board has been generous lately, increasing its dividend by a whopping 51% in 2025. Just don’t expect it to always increase at that pace.
There are risks. After a red-hot run, the shares may cool. Inflation could squeeze borrowers, push up bad debts and weaken demand for loans. A potential windfall tax raid in next week’s Autumn Budget could sink profits and investor demand. NatWest is particularly exposed, as nearly all of its revenues are generated in the UK.
Start small, think big
NatWest shares have slipped 6% over the past month amid concerns about inflation and the impact of rising bond yields on demand for dividend stocks. The dip could create a buying opportunity, but further volatility’s possible. NatWest trades on a surprisingly modest trailing price-to-earnings ratio of 9.8.
I think NatWest’s worth considering for the long term, although I’d be cautious about buying before the Autumn Budget as shares could move sharply on the day.
Nobody should build their retirement on one stock. Ideally, spread risk across at least a dozen shares from different sectors and with different risk profiles. At The Twelfth Magpie, we can also see another FTSE 100 dividend stock worth considering today. And this one yields a mighty 7%…
What income stock do we like better than NatWest Group Plc right now?
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Harvey Jones owns shares in NatWest.
This story originally appeared on Motley Fool
