A Stocks and Shares ISA remains one of the most tax-efficient ways for millions of Britons to invest. A goal that many of us have is to buy dividend shares that can contribute towards a passive income. Of course, it’s not as easy as just buying a stock then sitting back and relaxing. Here are some key points to bear in mind.
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.
Different considerations
It’s essential to note that the maximum amount that can be invested in an ISA per year is £20k. Therefore, if an investor had a large lump sum, it might not be possible to allocate all of this in one year. What’s more likely to happen is to invest some funds each month and gradually build up the size of the portfolio to its desired level.
When discussing time, it’s also crucial to consider that generating £10k a year in income would logically require an ISA size of over £100k. Therefore, it’s a game of patience, given the timeframes involved. This isn’t a get-rich-quick scheme!
Next, the focus is on what yield is on offer. Of course, an investor could buy a FTSE 100 tracker fund that pays out dividends. This would currently yield 3.16%. Alternatively, being active in stock selection could see someone pick up a yield in the 6%-8% range by holding a dozen or so shares. I think this is realistic, with the portfolio still benefitting from diversification.
Looking for stocks
One stock for consideration is MONY Group (LSE:MONY). The company is a UK-based fintech specialising in comparison services. It basically helps customers compare prices for things like insurance and banking products. It makes money from taking fees and commissions from financial firms for customer referrals and switching.
Over the past year, the share price is down, but by a fairly modest 6%, with a current dividend yield of 6.28%. I think the dividend is sustainable for a few reasons. Firstly, the dividend policy states that it “seeks to pay annual dividends in excess of 55% of the group’s annual profits after tax.” This provides a benchmark for investors, meaning that it’s clear when to expect a dividend and roughly the amount.
Further, the business has good cash generation given the nature of its operations. It also has a fairly low-risk model, in that there are very limited outcomes where the company is exposed to any shocks or significant losses. As a result, this makes the chances of it cutting the dividend quite low.
Looking forward, the management team has been investing more in automation. This should not only aid cost reduction for the future, but also make the company less sensitive to wage inflation. Ultimately, this should help to support profitability in the long run.
As a risk, the business is exposed to changes in financial regulation, marketing rules, or competition. Any of these factors could erode margins. Yet based on the current situation, I think it’s a stock for investors to consider.
Talking numbers
If someone had an average dividend yield of 7% and invested £500 a month in an ISA, this could compound to a portfolio value of £143,346 after 14 years. In the following year, this could generate just over £10k in passive income.
