There are many ways to skin a cat, as the saying goes, and even more ways to secure a second income. Working nights is less fun than it sounds and starting a side hustle’s a pain in the neck. Trust me.
One tried and tested way that requires minimal effort is by leveraging the tax benefits of investing in a Stocks and Shares ISA. Yes, there are risks involved but they’re arguably more manageable than the previous two options.
The key ingredient is capital – but even as little as £10 a day’s sufficient to get started. A basic plan an investor may consider is compounding returns to build a portfolio before transitioning to dividends for meaningful passive income.
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.
Realistic expectations
Consider a portfolio that delivers a consistent yearly return of around 10%. When looking at the recent returns of some major US tech stocks, that might sound low. But remember, this is a long-term strategy — Nvidia and the like won’t keep pumping out those huge returns forever.
Consistency is key and it’s best to be realistic when estimating income decades ahead. A well-balanced portfolio sacrifices high returns in exchange for reduced risk. Losing everything on one or two stocks isn’t a good look. It is however, a good way to learn the importance of diversification.
With just £10 a day to contribute, an investor may consider the following. With a portfolio that averages 10% returns, £3,650 a year invested in an ISA could balloon to over £650,000 in 30 years.
It could then be transferred to a dividend-focused portfolio that yields an average of 7% a year — equivalent to almost £50,000 of annual passive income.
Shares to consider
The portfolio would initially require reliable growth stocks to aim for an average 10% return. Think 3i Group, Unilever or Compass Group. These consistent, slow-growth stocks exhibit defensive qualities against market volatility. Index-tracking funds like the iShares Core S&P 500 ETF are also popular choices for similar returns.
When transitioning to a dividend portfolio, consider stocks with yields between 5% and 9%. However, it’s critical to consider the company’s longevity beyond just the yield. Some popular UK dividend-paying companies include Vodafone, Legal & General and British American Tobacco.
One I recently added to my portfolio is well-known insurance firm Aviva (LSE:AV.). It’s maintained a yield of around 7% for the past two years and increased its dividends at a rate of 8.4% for the past decade.
The share price is up 24% in the past five years, outperforming competitors like Legal & General and Phoenix Group. Recent results have also been impressive, with revenue up 10.9% year on year and earnings per share (EPS) up 57%.
In December, Aviva agreed to buy rival insurer Direct Line for £3.7bn, taking out a £1.85bn loan for the purchase. The acquisition could help expand its customer base and market share, but also runs the risk of significant losses if it’s not profitable. Legal fees alone are reportedly in the area of £23m.
When considering stocks, it’s important to check recent developments and asses any related risks.
However, analysts remain positive about the stock, with 12 out of 14 putting in a Buy rating with an average 12-month growth target of 15.8%.
