Spring is here, and that means it’s Stocks and Shares ISA season! Budding investors have only got a couple of weeks left to try to use up their contribution limit before the next tax year. Let’s take a look at a simple goal like £100 a month in passive income and how it might be achieved.
Fill it up
The first thing to mention is that ISAs are generous – very generous. They have been referred to as the ‘world’s best investment wrapper’ and with good reason. Any earnings in the accounts are entirely tax-free, no matter how high the total climbs. And a £20,000 yearly deposit limit means only those stashing away over £1,600 every month have to worry about going over the limit.
So what about that £100 a month return? Well, if we’re still building up the ISA (in other words, not withdrawing yet) then we might aim for a 10% yearly return on average. That means £12,000 in the ISA could churn out £1,200 each year. The big caveat there is the word ‘average’ as there would be lots of ups and downs along the way. Also, 10% isn’t necessarily easy to achieve and many ISAs return less.
And when we want to withdraw the cash as a passive income? The situation changes. In the event of a bad year or three, the downswings can annihilate a nest egg if we’re withdrawing too quickly. That’s why many choose a ‘safe withdrawal rate’ of 4%. That would mean we want £30,000 in the ISA to get our £100 a month.
Of course, as investors we want to get the best bang for our buck. In other words, we want the highest possible income for the lowest possible cash stumped up. Let’s take a look at one strategy investors have open to them.
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.
Handsome returns
One option to aim for above-average returns is to take advantage of individual stock picking. Even a boring ‘dinosaur stock’ like British American Tobacco (LSE: BATS) can provide handsome returns and may be worth considering.
Some may baulk at the idea of investing in a company with products that are hazardous to health and on the decline. One of the bigger risks is the ‘generational ban’ on smoking that will make those born after a certain year unable to buy the products. And there’s an ethical component to such a ‘sin stock’ that might put investors off too.
But these criticisms have been in play for decades. And it hasn’t stopped the seller of Lucky Strike and Dunhill from offering excellent dividends and share price appreciation down the years.
The increasing share price makes a huge difference too. For example, a share bought today pays a dividend yield of a touch over 5%. But a share bought two years ago now pays above 10% on the original stake because the share price has just about doubled in that time.
There are undoubtedly many stocks around at the moment that could offer similar returns in the years to come. I think it’s worth bearing the benefits in mind to get the most passive income out of a Stocks and Shares ISA.
