This year’s Stocks and Shares ISA deadline is approaching fast. UK investors have until 5 April to use up their £20k tax-free ISA allowance for this year.
Tax-free allowances for dividends and capital gains are going to fall sharply from April 2023. As a long-term investor, it makes sense for me to take advantage of the tax shelter provided by an ISA.
My approach to investing is to drip-feed cash into my account every month. My aim is to build my ISA into a dividend machine that will provide me with a reliable second income. Here’s how I’m doing this.
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.
Keep it simple
I’m not trying to be too clever. I just want to buy proven good businesses that are consistently profitable, with a track record of steady growth and reliable dividends to help me build up my nest egg.
For this reason, most of the shares I’d look at are from the FTSE 100 and the FTSE 250 indices.
For example, Legal & General and Aviva have both been in business for more than 100 years and offer dividend yields over 7%. Tobacco isn’t everyone’s cup of tea, but British American Tobacco and Imperial Brands both yield more than 7% and look fairly safe to me.
Elsewhere, I’m attracted by the defensive qualities of consumer goods companies such as Unilever (3.8%) and healthcare stocks like GSK (4%).
I’ve also dipped my toe into the banking sector, with a recent purchase of NatWest Group (6.1%). In my view, UK banks look like fairly safe investments today.
Crunching the numbers
My plan is to continue drip-feeding some of my earnings into my ISA each month until I’m able to retire. While I’m still working, I reinvest all of the dividends I receive. By using them to buy more shares today, I hope to boost my future income as I benefit from the power of compounding.
To explain how I hope this will work, I’ve put together some example numbers.
The average annual return from UK stocks since 1900 is about 9% per year. That’s the conclusion from a recent report by Credit Suisse. Returns vary widely from year to year, of course. But I’ve based my sums on this figure as I’m looking at a long timeframe.
With a monthly investment of £350, I estimate that my ISA could be worth around £355,000 after 25 years.
Using a standard withdrawal rate of 4%, that could give me an income of £14,200. That’s 50% more than the current state pension of £9,628.
My strategy won’t necessarily suit everyone. But, in general, I think that the tax-free benefits of an ISA account mean it’s a great way to get started in the stock market today.
