Imagine earning an extra £500 a month in a Stocks and Shares ISA without lifting a finger. Is that a realistic possibility right now? As a keen dividend investor myself, I think the answer is an emphatic ‘yes.’
In fact, hitting that target is more achievable than ever before with the right investing strategy. With a galaxy of dividend shares and funds to choose from, the ISA providing tax protection, and fierce competition among investing platforms keeping fees low, building a second income is well within reach.
Here’s how large your nest egg might need to be for a tasty £500 monthly 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.
Here’s one answer
There are a number of ways that individuals can generate cash from an ISA. One popular method is to withdraw 4% of the portfolio each year, which provides an income for about three decades before the pot runs dry.
A £500-a-month income equates to £6,000 over the course of a year. So someone using the 4% withdrawal strategy would need a portfolio of £150,000.
Thanks to the ISA’s tax breaks and the wealth building power of the stock market, that’s a very achievable goal for most of us. Drip-feeding £300 into a shares portfolio each month with an annualised return of 9% would deliver that after 17 years and five months.
Why settle for that?
That’s not bad. But as I say, making regular withdrawals is just one way to source a passive income. What about if someone decided to invest their ISA in high-yield dividend shares?
While dividends are never guaranteed, this could require a far smaller portfolio. If someone invested in 7%-yielding dividend shares for a £500 monthly income, they’d need a portfolio of just over £85,700.
This could trim years off the investing timescale. Based on the same £300 monthly ISA contribution, an investor could reach their goal within 12 years and 10 months.
Building a second income
The beauty of this method is there’s no portfolio depletion over time, as dividend shares can both grow in value and deliver income. This can relieve worries about running out of money come retirement.
As I say, dividends are not a dead cert, and cash rewards can disappoint when a company experiences problems. However, investors can manage this problem by building a well-diversified portfolio.
Exchange-traded funds (ETFs) that hold dozens (if not hundreds) of stocks can help investors effectively achieve diversification. The JP Morgan Global Equity Premium ETF (LSE:JEGP), for instance, has holdings in 243 dividend-paying businesses, many of which operate across the world.
These include drugs producers (Johnson & Johnson), telecoms providers (Orange), miners (Newmont), and consumer goods manufacturers (Pepsico). As a result, investors can be confident of receiving a healthy, dependable second income across the economic cycle. The forward dividend yield here right now is 7.6%.
What I also like is that dividends here are paid monthly, giving investors access to their cash sooner than many other ETFs. I think it’s a top fund to consider, even though it could fall in value during times of broader stock market volatility.
