£287 a week? Here’s how an investor could use an ISA to build alternate income

Jon Smith outlines both the value in using an ISA for investing and also how a tidy second income can be generated by making use of it.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Aiming for a second source of income is never a bad idea. There are many ways to try and do this, ranging from property to Government bonds. Yet as an experienced stock investor, I believe that the stock market is one of the best ways. When using an ISA, an investor can boost their dividend potential, providing the source for income. Here’s how.

Using the right tools

An ISA can be a great tool as it allows an investor to maximise the net proceeds from a dividend payment. What I mean by this is that dividends received within an ISA aren’t subject to dividend tax. So the gross payment amount from the company is all ours. Even though this might not seem like a big thing, when we compound income payments over years it really is a big advantage.

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.

Should you invest £1,000 in BP right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BP made the list?

See the 6 stocks

A second income like this can be made by picking dividend stocks that are sustainable in nature. There’s little point in selecting a stock that has a crazily high yield that’s only because the share price is falling rapidly. In that case, the dividend might get cut in the near future, causing the yield to drop. Rather, investors can look to target stocks with a generous yield. But they should look for those where there’s a good track record of paying it out over several years.

A reliable payer

One example of this is Investec (LSE:INVP). The FTSE 250 bank has a current yield of 6.47% and boasts a record of continuously paying dividends for over two decades.

Created with Highcharts 11.4.3Investec Group PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

The strong yield isn’t due to a falling share price. Rather, the stock price is up 8% over the last year. It has benefitted from interest rates remaining higher for longer. This has meant that its net interest income earned hasn’t fallen as expected, with the latest half-year results showing it actually increased by 2% versus the same period the previous year. Aside from that, the 13% rise in fee and commission revenue from the sale of financial products to private and corporate clients helped to boost profitability.

As long as the business continues to be profitable, I don’t see the dividend as being under threat. One risk is the rising expected credit losses. The expected impairment charges in the latest report were £66.9m, up from £46.3m from the year before.

Breaking down the figures

An investor could consider building a portfolio of sustainable stocks like Investec with an average blended yield of 6.5%. The results could be impressive. If they invested £750 a month and reinvested the dividends for 15 years, the pot size could reach £229.6k. This means that in the following year, it could generate £14.9k in income, averaging £287 a week.

There’s a need to be careful in putting too much faith in forecasts. But there’s good long-term potential for income generation in this strategy.

Should you buy BP shares today?

Before you decide, please take a moment to review this first.

Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.

It’s called ‘5 Stocks for Trying to Build Wealth After 50’.

And it’s yours, free.

Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.

And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.

That’s why now could be an ideal time to secure this valuable investment research.

Mark’s ‘Foolish’ analysts have scoured the markets low and high.

This special report reveals 5 of his favourite long-term ‘Buys’.

Please, don’t make any big decisions before seeing them.

Claim your free copy now

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.

Our best passive income stock ideas

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Dividend Shares

Investing Articles

This FTSE 100 heavyweight’s yield is forecast to rise to 8% by 2027 and it looks 60%+ undervalued to me too!

This FTSE financial gem looks very undervalued to me and its yield is projected to rise to well over my…

Read more »

Investing Articles

As collapsing share prices send dividend yields soaring, which income shares look attractive?

With shares in energy companies falling, Stephen Wright thinks dividend investors should consider taking advantage of some unusually high yields.

Read more »

Investing Articles

3 simple principles to help build wealth in an ISA

As a new tax year opens up new ISA allowances for many investors, our writer shares a trio of things…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Dividend Shares

The Trump slump has smashed these FTSE 100 shares!

After a rough week for US and UK shares, investors have been shaken. But now these FTSE 100 stocks have…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

Is Diageo still a great stock for passive income investors? Here’s what the CEO says

Here’s why the CEO of the FTSE 100’s largest drinks company thinks the firm can navigate a changing industry to…

Read more »

Investing Articles

I asked ChatGPT for the best stocks to earn a second income and it recommended…

ChatGPT's recommended these four FTSE 100 titans as the best stocks to buy for a second income, but are they…

Read more »

Investing Articles

These FTSE 100 dividend stocks have 9% yields!

These are the three highest-yielding dividend stocks in the FTSE 100, offering near-double-digit payouts. Are these screaming bargains?

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

Why hasn’t its 9.9% yield boosted the Phoenix share price?

Phoenix Group has a dividend close to double digits, but saw a weak share price performance in recent years. Christopher…

Read more »