Image source: Getty Images
A monthly income of £8,333 from dividends in a Stocks and Shares ISA would be a dream come true for many. Even in future, it would likely provide most with a more comfortable existence, especially if it’s supplemented other forms of income.
To put £8,333 a month into perspective, we’re talking about an annual tax-free income of £100,000. And according to the latest Retirement Living Standards (based on independent research by Loughborough University), this would be more than double what it officially defines as a ‘comfortable’ retirement for one person.
But how big would the ISA need to be to generate this level of income?
The miracle of compounding
The bad news is that the portfolio would need to be worth roughly £1.43m, assuming a 7% dividend yield. That’s not the sort of money that can be rustled up overnight or found down the back of the sofa.
The good news, though, is that it can be built over a long period of time. That’s especially so if some powerful methods are used along the way.
One is reinvesting dividends until the target is reached. This fuels compounding, as cash dividends are used to buy more dividends, and those then do the same, year after year.
Another smart thing to do is to have a separate rainy-day fund. This would be ready for emergencies (broken boiler, car repair, sudden redundancy, etc). This prevents the selling of shares and the interruption of the compounding process.
Finally, savvy investment decisions can generate superior returns, reducing the time it takes to reach that £100k annually. These include focusing on high-quality companies with durable cash flows, solid returns on capital, and strong balance sheets.
Gaining experience
Of course, not every investment will be successful. Individual dividends can be cut if a firm runs into difficulties. However, avoiding loss-making enterprises with questionable competitive positions and overvalued shares can help.
Over time, as research and stock-picking skills improve, I think it’s possible to aim for an 11% average annual return (although it isn’t guaranteed). If this were achieved, it would take roughly 27 years to reach £1.43m. That’s by investing £750 a month (excluding any platform fees).
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.
A global bottling giant
One FTSE 100 share to consider to help grow a portfolio is Coca-Cola HBC (LSE:CCH). This European business bottles and sells brands for Coca-Cola across parts of that continent and Africa.
We’re looking at brands like Fanta, Schweppes, Sprite, and of course, Coca-Cola. It also sells Costa-branded coffee products and Monster energy drinks.
These have helped drive 9%-11% growth in sales and profits for years now. This is reflected in a five-year 60% share price rise. That’s before dividends, which also grew strongly.
One thing that might hold the stock back is a spike in inflation. If this occurred, it might force the firm to up prices, potentially putting pressure on volume growth.
On balance though, I see this as an excellent UK stock for beginners to consider. The company has agreed to acquire a 75% controlling stake in Coca-Cola Beverages Africa. This is the continent’s largest Coca-Cola bottler, and the deal opens up long-term growth opportunities across 14 emerging and frontier markets.
The stock is reasonably priced and offering a 3.1% dividend yield.
This story originally appeared on Motley Fool
