How I’d turn an empty Stocks and Shares ISA into a £50k annual income!

Holding top-notch dividend stocks inside a Stocks and Shares ISA is arguably one of the best ways to build a tax-free income stream. After all, with capital gains and dividend tax made completely irrelevant, ISAs are a powerful wealth-building tool for British investors. Even when starting from scratch, it doesn’t take much capital to get the ball rolling on earning an extra £50k each year.

Earning £50k in dividends

On average, FTSE shares typically provide a yield of around 4%. That’s actually pretty high compared to other stock markets worldwide. For reference, the S&P 500 in America currently yields about 1.4%, while the Stoxx Europe 600 offers a slightly higher 2.4%.

However, achieving a yield of 5% from UK shares isn’t difficult when being a bit more selective rather than relying on a FTSE 100 index fund. It wouldn’t even expose an investor to that much extra firm-specific risk since there remain plenty of diversification options.

Yet, even at a 5% yield, earning £50k a year at this rate would require an ISA worth roughly £1m. That’s obviously not pocket change. But by being patient and staying diligent, building a seven-figure portfolio with just £500 a month is more realistic than many believe.

Providing that a portfolio generates a 9% total return each year, injecting £500 into top-notch stocks each month would eventually lead to a £1m portfolio within just under 31 years. Of course, none of this is guaranteed since returns can fall as well as multiply. But with the potential to earn £50k passively and with zero tax to pay, it’s a financial goal worth pursuing.

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.

What are the best UK shares to buy?

Regardless of size, every business has risks investors must consider. Industry titans are constantly put in the crosshairs of smaller disruptors. But these smaller businesses also have their fair share of challenges to overcome.

Therefore, should an investment fail to live up to expectations, investors may end up earning less than a 9% return each year. And that could also mean having less dividend income in the long run.

Having said that, the evidence is pretty clear that top-quality businesses, while not risk-free, are far more likely to bolster returns in the long run. And that’s why Howden Joinery (LSE:HWDN) is a terrific place to start, in my opinion.

The vertically integrated fitted kitchens and joinery specialist is delivering solid results despite the adverse operating conditions. And as per its April trading update, sales are coming in higher than a year ago. In the meantime, with fitted bedrooms now entering the product mix, the firm continues to expand its depot network and market share, translating into four years of consecutive dividend growth.

Today’s 2.3% dividend yield is below the 5% target. But this may quickly change in the next few years if dividends continue to grow at their current 12.6% average pace. Of course, that’s assuming the business doesn’t get disrupted along the way. Howden’s certainly not the only player in this space. And should the economic climate take another turn for the worse, growth could slow considerably in the short term.

Nevertheless, given the group’s impressive track record of creating value for shareholders, I feel these are risks that may be worth taking when kicking off a new long-term ISA portfolio.