We can use passive income for all manner of things. We can use it for mundane things like paying the bills or we can be more inventive.
Maybe we’re between jobs and we want to take the summer to relax, or maybe we’re in the teaching profession and we want to create a kitty for those long summer holidays.
Whatever it is, there’s a world of possibilities.
Today, I’m looking at how I could go about turning a Stocks and Shares ISA into a vehicle that generates enough passive income to take the summer off and enjoy myself.
How it could work
Well, let’s assume I’m taking three months off work. I’m going to want to relax all the way through June, July, and August. But I’m not just going to kick about at home. I want to travel and explore, but perhaps not on an influencer budget.
I’m going to say I need £2,000 a month or £6,000 for the entirety of the summer. And I’m going to achieve this by investing in stocks that reward shareholders with dividends.
I’m also going to use a stocks and shares ISA as the platform for doing this. That’s because, if I have a Stocks and Shares ISA, I don’t pay tax on any dividends from shares and I don’t pay capital gains tax on any profits made from the investments.
It’s important to note that I don’t necessarily need the dividends to be paid in the summer. I can set the money to one side when I receive it. Although it is worth noting that many companies will pay their final dividends in April or May, after the financial year has been completed.
The numbers
To generate passive income, you’ve got to have money to invest. If I was purely investing for dividends, I would pick stocks like Legal & General, Phoenix Group, and housebuilder Vistry right now. Collectively these investments could give me a return of 8% in dividends alone — that’s probably the most I could expect to receive without sacrificing the sustainability of the yield.
So, to generate £6,000 in passive income with stocks averaging an 8% yield, I’d need £75,000 invested. That’s a lot more money that most Britons have sitting in their ISAs.
But I mustn’t fear. Because building my portfolio can take less time that many anticipate. The thing is, I’ve got to reinvest and I’ve got to contribute regularly. Of course, no investment strategy is guaranteed, and I could lose money, but this is a compound returns strategy and is the favoured strategy of many a seasoned investor.
If I start with nothing, but contribute £400 each month, increasing that contribution by 5% a year, while investing and reinvesting in stocks paying an 8% yield, it would take me nine years to reach £75,000.
After nine years, I could start drawing down on this money rather than contributing. Instead of contributing £4,800 a year, I’d be receiving £6,000 every year going forward.
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.
