A Stocks & Shares ISA is a great tool to grow an investment pot. Due to the lack of tax incurred on capital gains and dividends, it can be used in a variety of different ways. One way is to focus the entire ISA on building an income-generating portfolio. With an ambitious aim of a 7% yield, here’s my plan.
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.
Getting the ball rolling
I’m going to assume that I’m starting my ISA from scratch. This makes things a lot simpler to build, rather than already holding existing stocks in the portfolio. However, if I did hold multiple stocks already, I’d need to factor in any existing shares that pay income and the yield. This would then impact what I’d buy going forward.
Starting with an empty ISA, my initial focus would be to start putting my money to work. This would involve spending the first couple of months buying dividend shares that I think offer good value and also pay out generous income.
As a side note, I’m not too fussed in the beginning about stocks that have an exact yield of 7%. Even though this is my target yield, I can increase my yield by adding different stocks further down the line. To begin with, I just want to get going.
Altering the overall dividend yield
Once I’ve got a dozen stocks in the portfolio, my risk is well diversified. This is especially key when building an ISA purely around income. This is because if I just hold a few stocks and one cuts the dividend, it has a large impact on my overall pot.
Yet if I own a broad range of companies from different sectors and geographies, it reduces this risk. Even if one runs into problems, I can deal with it.
So my focus after diversification is working on increasing my yield to 7% (or maintaining it at this level). Let’s say my current yield after a year is 6%, split between nine stocks. What I can do is buy the tenth stock with a yield of 9%. This will increase the overall yield to 6.3%. I can continue to tweak the portfolio to adjust the overall yield as needed.
The potential over time
My limit to invest in an ISA is £20k per year. Let’s say that I manage to invest £10k a year at my 7% target yield. Any income I make during this period I reinvest back in more stocks.
After 15 years, I could have a pot worth £266k. More importantly, in year 16, I would make just under £20k just from dividends! Of course, nothing is guaranteed, with various expected factors over the years potentially sabotaging the goal.
There will come a natural point in time (eg, retirement) when I’ll probably choose to take some of the money out to enjoy it. But until that point comes, the growth rate of the ISA can become very impressive.
