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A Stocks and Shares ISA can be a great tool for people to make tax-efficient investments. Obviously, everyone’s circumstances are different, but being able to accumulate dividend income without paying dividend tax on it is a big help. For those aiming to kick on and make a five-figure annual passive income, here’s how to go about it.
Tweaking parameters
To begin with, it starts with the numbers. Building a £10k second income is only realistic if someone can commit to regularly investing a set amount each month in the hundreds of pounds. It’s not really feasible to invest £10 a month and expect to grow a portfolio to a decent size (even after decades). Of course, there’s a cap on how much you can put into an ISA, currently £20k per year.
It’s true that the portfolio’s average yield can be adjusted based on risk tolerance. A low-risk portfolio could aim for a 3% return, which would require more money to be invested. Alternatively, a riskier portfolio could yield in the 7%-9% range, which may be more appealing.
If I assumed an investor could invest £500 a month in a portfolio with an average yield of 7%, in year 15, they could stand to bank £10,558 just from the income payments. This would equate to a total ISA size of £159,905. Given that this forecast extends years into the future, it should be taken with a pinch of salt. The actual timeline could be longer or shorter depending on a wide range of events that occur over the period.
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.
Show me the money
Beyond the numbers, it’s essential to start to consider shares that could form the backbone of the ISA for this strategy. For example, MONY Group (LSE:MONY). Over the past year, the stock is down 4%, with a current dividend yield of 6.64%.
The group operates a set of popular UK consumer-facing brands that include services for comparing insurance, loans, and other financial products. It makes money by getting paid a referral fee or commission from the provider when someone clicks through or makes a purchase. As a result, it’s an asset-light business with strong cash flow, which is appealing to income investors.
The last full-year earnings showed an adjusted EBITDA of £141.8m (its highest ever). Although this year has been more challenging, it’s still set to record a decent profit for 2025. As a result, earnings can easily cover the current dividend. In fact, the dividend cover ratio is 1.4x, so there’s plenty of buffer here.
Looking ahead, I think the company can do well as it isn’t reliant on a single market. Instead, it has multiple revenue streams, allowing resilience even when parts of the market are weak. However, one risk is a change in customer behaviour. The model relies on consumers proactively comparing providers. If people switch to having more direct purchases or strong brand loyalty, this could change things.
Overall though, I think it’s a stock for investors to consider as part of the broader second income ISA idea.
This story originally appeared on Motley Fool
