The Stocks and Shares ISA is one of the most effective ways to build long-term wealth. It’s why almost 4m Brits currently buy shares, funds, and trusts in one of these tax-efficient products.
They protect investors from capital gains tax and dividend tax, giving them more money to supercharge the compounding effect to grow their wealth. What’s more, there are no taxes to pay when money is withdrawn.
But how much would an ISA retiree need to realistically target a £30k passive income each year?
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Retirement options
This depends on how they decide to turn their retirement fund into a steady flow of income.
One option they’d have is to buy an annuity, which is an insurance product that pays a guaranteed income for life. The trade-off for this security, though, can be a far lower return than other retirement strategies may offer.
Another choice is to draw down a set percentage of their nest egg each year. This way, the money stays invested, allowing it to grow over time. But on the downside, there’s the risk of significant capital depletion if markets underperform or withdrawals are too high.
They can also choose to invest in dividend shares, and to live solely off the income they provide. This method leaves their ISA capital intact and able to grow, and which also generates a dividend income that can increase over time.
Targeting a £30k income
The passive income an investor receives using this strategy can be substantial. But the exact amount will depend on the size of the portfolio and its dividend yields.
With a portfolio of £500,000, someone investing in 5%-yielding stocks would make £25,000 a year. Alternatively, a 7%-yielding portfolio would generate a £35,000 second income.
So, to target the £30,000 income we discussed at the top, someone would need to invest in 6%-yielding dividend shares.
They can aim for a greater income with higher-paying companies, as our 7% dividend share calculation shows. But as a rule, the larger the yield, the greater the risks can be in terms of potential dividend cuts and share price volatility.
A top trust
6% yields are still on the higher side, of course. And it’s important to remember that any proposed dividend is never guaranteed, whether tiny or large. But investors can spread out this risk with a diversified portfolio of shares.
Investment trusts like the Henderson High Income Trust (LSE:HHI) can be quick and simple ways to achieve such diversification. This particular trust offer a forward yield bang on the 6% we’re looking for.
What makes it such a good trust to consider for dividends? Roughly 80% of it is invested in (mostly UK) shares, giving it scope for payout growth over time. Indeed, annual payouts here have risen every year since 2012. And the rest of the trust’s capital is held in investment-grade bonds, which can be a more dependable source of income over time.
In terms of the equities it holds, these are spread across sectors including financial services, consumer goods, utilities, and industrials. There are 105 in total, which should reduce the impact of one or two company shocks on overall returns.
Henderson High Income offers less geographic diversification than global trusts. But, in my view, it’s still a great investment for retirees seeking dividend stocks to consider.
