This stock could turn my ISA into a second income machine

Jon Smith talks through a FTSE 250 stock with a current dividend yield of 6.46% that could offer him a solid source of second income.

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My Stocks and Shares ISA is a great tool to shelter my dividends and capital gains from tax. It’s perfectly legal, and an investment vehicle that’s encouraged by the government. So when I’m looking at ideas to help my ISA turn into a second income machine, here’s one stock that fits the bill.

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.

A growth stock paying income

I’m talking about IG Group (LSE:IGG). The retail trading and investment platform is one of the largest in the UK (and counts me as a client). The share price is down 12% over the past year.

It provides a range of services built on it’s own online and mobile platform. This ranges from more short-term speculative trading, through to being a place I can hold my ISA.

The growth in the business can clearly be seen from the revenue increase over the past few years. Revenue has grown each year since 2019. For example, back in 2019, it reported £483.2m, before crossing £1bn in 2023. That’s some increase!

Profit before tax for the last full year came in at £449.9m, showing just how large the profit margin is for the company. As a result, it was able to increase the dividend per share payment. This means the current dividend yield is 6.46%, well above the FTSE 250 average.

A good shot for reliable income

The business has been paying out dividends for the past decade, keeping it flowing during the pandemic and other tricky periods over this timeframe.

One part that excites me for the future is the growth of the US market, via financial platform tastytrade. This was a firm IG bought back in 2021 to help it enter the US market. Revenue here jumped 20% in the January half-year report versus the year prior. Given the huge potential opportunity with the US, I think this is definitely something to keep an eye on.

Naturally, higher profits from here should also support a higher dividend in the future. This is a key factor that makes me think dividends could be churned out to my ISA in a regular and reliable fashion.

Black swan risk

When I look forward, I struggle to see anything that could materially cause the dividend to be cut. The generous profit margin means that the dividend will be covered by retained earning, unless something terrible happens.

Of course, something large could happen. One risk is perhaps that we see a black swan event in the markets that causes a lot of investors to lose money. This could cause business to slowdown for IG Group, as people pull their money out and decide to sit on cash for a period of time.

Ultimately, the track record of growth, high margins and US expansion all lead me to think that IG Group could outperform going forward. On that basis, I’m seriously considering adding the stock to my portfolio shortly.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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