Instead of taking on more work to earn a second income, investors can use the power of a Stocks and Shares ISA to earn extra money entirely tax-free. But best of all, there’s no need to work extra hours, allowing individuals to have more time to spend with family and friends.
Even if someone were to start a brand new £20,000 ISA today, with the right investments, they could start earning a small second income by the summer. Here’s how.
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 quarterly dividends
Rather than buying shares in younger high-growth enterprises, investors can instead focus on the typically more mature industry leaders. It’s a far less exciting way to build wealth in the stock market. But it can come with one major advantage: dividends.
While not all large-cap stocks pay dividends to shareholders, those that do often stick to a regular schedule of once a quarter, once every six months, or once a year. There are even a small handful of stocks paying dividends every month.
But the key date to watch is the ex-dividend date. This is the point where, so long as an investor buys shares on or before this point, they’re eligible to receive the next dividend payment.
So which dividend stocks should investors be looking at that would start paying out this summer?
A 5.5% income opportunity
A popular UK income stock is British American Tobacco (LSE:BATS). While not everyone’s comfortable with the idea of investing in a tobacco business, this moral objection is a big reason why the stock’s offered chunky dividends. And right now, even after climbing 38% in the last 12 months, the FTSE 100 stock still offers a 5.5% yield.
In terms of money, that means a £20,000 investment today would unlock an annual second income of around £1,100. What’s more, with the next ex-dividend date set at 26 March, investors who act quickly will be able to receive their first pay day later in May.
However, while exciting, it’s important to fully understand both the risks and potential rewards.
Taking a step back
On the bull side, tobacco companies sell products that are notoriously addictive. And that’s translated into some enormous pricing power to offset volume decline with higher prices, fuelling a dividend that’s increased each and every year for decades.
On the bear side, regulatory pressure against tobacco companies has been steadily mounting. And even tobacco companies have admitted their business models need to evolve to stay alive in the long run.
British American Tobacco in particular has been allocating a lot of capital and resources to its ‘healthier’ New Categories, which include products such as vapes, heated tobacco, and oral nicotine – a strategy which does appear to be delivering results. But whether this novel part of the business will be able to outpace escalating regulations is where the uncertainty lies.
For now, the business appears to be a quality second income-generating stock with a comfortably cash-covered dividend. As such, for those who don’t mind owning a part of a tobacco business, it could be worth a closer look.
But if cigarette volumes continue to decline and New Categories fails to offset and replace the lost income, the firm’s multi-decade long payout hiking streak could come to an end – a risk that investors need to carefully consider.
