Investing in high-quality dividend stocks using a Stocks and Shares ISA is a phenomenal way to generate a passive income. After all, thanks to the advantages of an ISA, all capital gains and dividends earned can be enjoyed entirely tax-free.
So, how much does a 40-year-old need to invest to earn an extra £1,000 each month from their investment portfolio?
Calculating targets
The size of the required portfolio to generate a £12,000 annual investment income ultimately depends on which stocks an investor buys.
Most investors rely on index funds for their simplicity and hands-free advantages. However, the FTSE 100 currently only offers a yield of 3.1% putting the required portfolio size at a staggering £387,100.
The FTSE 250 is a bit more generous at 3.5% which brings the threshold down to £342,860. But both of these payouts pale in comparison to some of the individual dividend-paying companies available to buy right now. And with some offerings yielding closer to 6%, the threshold to start earning £12,000 could be brought as low as £200,000 – over 40% less.
Obviously, that’s still a significant sum. But by consistently drip feeding £500 into a Stocks and Shares ISA each month, at a 6% annual yield and modest 4% annual capital gain, this objective could be completed in around 13 years. And if left to compound for another decade, this portfolio could reach £532,775, generating a monthly dividend income of £3,110.
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.
Earning a 6% yield
While simple on paper, earning a consistent 6% dividend yield can be quite challenging, even in the UK. That’s because higher yields often come with higher risks. So investors need to be rigorous in their analysis before allocating money to a promising-looking dividend stock.
Let’s take a look at ITV (LSE:ITV) as an example to consider. The stock hasn’t been a particularly strong performer of late, but dividends have kept flowing. And as such, the TV & Film streaming enterprise currently offers an impressive 6.3% payout.
There’s a variety of forces at work here. ITV shares have been kept on a short leash following management’s decision to invest aggressively in new productions. While this opened the door to a few blockbuster hits, it’s unclear whether, in the long run, investing billions into new shows will succeed in creating value for shareholders.
This uncertainty has only been amplified by the weak advertising environment throughout the UK and Europe. Don’t forget, selling ad slots on its online streaming platform or through its TV broadcast is how ITV makes the most of its money.
This headwind may not ultimately matter if ITV sucessfully sells its ad-driven Media & Entertainment arm to Sky. However, even if the deal fails, as economic conditions improve, the cyclical demand for advertising could begin to recover. And with management successfully finding opportunities to cut millions in annualised costs, the group’s cash flow might be well positioned to thrive as its monthly active users continue to move closer to the 20m target by the end of 2026.
There’s no denying, buying ITV shares right now comes with significant execution and macroeconomic risk. But with a modest valuation and a high dividend yield, that could be a risk worth considering inside of a Stocks and Shares ISA.
