Image source: Getty Images
In less than two weeks, the deadline for the current Stocks and Shares ISA year will have passed. Currently, the maximum amount an investor can put in the ISA is £20k a year. From there, they are free to buy and sell stocks as they please, with certain tax benefits. Assuming the target was purely to build up passive income, here’s what the numbers could look like over time.
Active over passive
Before we get to the specific numbers, let’s run through the process of how this would all work. Cash gets moved to the ISA, where it then becomes available to invest. By selecting shares that pay out dividends, the investor can benefit from a source of income. Typically, these dividends get paid out a couple of times a year, in line with half-year or full-year accounts.
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.
The ISA protection means that dividend tax isn’t payable, allowing the full amount to be banked. When a dividend is received, it can buy more of the same stock. This can compound future dividends, growing a second income at a faster pace.
To keep things easy, some might just buy a FTSE 100 fund that distributes the income, using the average dividend yield of 3.54%. This is an idea, but I feel that with more active stock-picking, a much higher yield can be achieved without taking on a huge amount of risk.
For example, an investor could achieve an average yield of 7% by including a dozen shares from the FTSE 100 and FTSE 250. This would include stocks from a range of sectors, with different dividend payment dates throughout the year.
Real estate options
One example that might be considered for inclusion in such a portfolio could be Land Securities Group (LSE:LAND). The firm is one of the largest commercial property owners. This ranges from office spaces right through to shopping centres.
It makes money primarily through the rental income that it gets from renting out the buildings. The relatively stable nature of this cash flow makes dividends consistent. It’s also classified as a real estate investment trust. This means it has to pay out a set amount as dividends in order to keep this status.
Over the past year, the share price has been down 13%. Part of this reflects the ongoing concern around commercial property, such as the continued desire for some to work from home. Another factor is the 34.9% loan-to-value ratio from the latest results. With interest rates staying higher than expected for longer, refinancing existing loans or taking on new loans is going to cost more than previously expected.
Even though these remain risks going forward, I think it’s a good stock for an income investor to consider. The current dividend yield is 7.11%, with a dividend cover of 1.27. Any coverage figure above 1 shows that the company can pay the dividend from the latest earnings, which is a good sign.
Running the numbers
If someone were to invest £1666 a month (£20k a year) in a portfolio yielding 7%, the numbers could add up quickly. If this was kept up for seven years, then in year eight, it could make £1,154 a month in passive income.
