A Stocks and Shares ISA can be an excellent tool for investors to build wealth over time. Although some prefer to invest and forget about it, the ISA can be a way to generate regular monthly tax-free income through dividends. In fact, by reviewing an existing ISA, it could be surprising just how much it could make.
Minor changes to boost yield
I’m going to assume that an investor has a pot of £40k already, built up over several years. If it’s a mix of FTSE 100 and FTSE 250 stocks, they should already be making income from it. This is because the average yield from both indexes is almost identical at 3.28%.
Yet when I consider that there are stocks that yield more than 10%, it’s clear that with some tweaks, the portfolio yield could be enhanced significantly. By swapping out some lower-yielding options for higher-yielding ones, the average yield of the portfolio can increase without taking on a significant amount of additional risk. This is because the risk is spread between all of the stocks in the ISA.
For example, let’s say the ISA has 20 stocks, with a yield of 3.28%. If we remove two and add two fresh ones with a yield of 9%, the overall yield rises to 3.85%. Yet the investor still has 20 stocks, so it’s not a concentrated portfolio that we should be worried about.
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.
One to consider
A dividend share that could be worth researching for this strategy is the Bluefield Solar Income Fund (LSE:BSIF). It’s an investment trust that primarily invests in UK-based solar energy assets. Over the past year, the share price has been down 9%, but it boasts a dividend yield of 9.14%.
The business model is quite simple in that the goal is to generate long-term, stable income by selling electricity generated by its renewable energy projects. It can sell the electricity produced by its solar and wind farms to the national grid or through purchase agreements with commercial partners.
Given that around 60%-70% of the fund revenues are underpinned by long-term contracts and subsidy schemes, it offers predictable cash flows. This makes it attractive for income investors. Notably, the yield has remained above 5.5% for the past five years. Looking forward, dividend cover is 1. This means the earnings per share cover the current dividend per share completely. It’s a good sign that the yield is sustainable, although it would be better if coverage was higher.
However, investors need to be cautious about the share price falling, as this can erode profits. One concern is that it’s partially reliant on government funding, particularly through legacy subsidy schemes. If the government is forced to cut back on spending to improve the fiscal situation here in the UK, it could be a negative hit to Bluefield’s income.
Talking numbers
Based on my calculations, a £40k ISA with around two dozen stocks can be adjusted to include some high-yield options. If half the stocks were at the average index yield of 3.28% and the other half were at an average yield of 8.5%, the blended portfolio yield would be 5.89%. This means that in the following year, it could generate a monthly income of £196. This is without investing any new capital. Of course, this isn’t guaranteed, but it’s a good indication of potential cash flow.
