With all dividends and capital growth earned tax free, a Stocks and Shares ISA is likely to grow more quickly than other investment products. And with a bit of patience and some discipline, I reckon it’s possible to use one to earn a substantial second income, starting with a relatively modest sum. Let me explain.
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One approach
If someone had an ISA worth £500,000 and earned a 4% annual return from a portfolio of dividend shares, they would be able to generate £20,000 a year, or £1,667 a month.
I admit that half a million pounds sounds like a lot of money. In fact, it IS a lot of money. But if someone starting with £1,000 was able to supplement this with a monthly investment of £100, they could get there reasonably quickly with a successful stock-picking strategy.
For example, it they could achieve an annual growth rate of 15.3%, it would take 26.5 years to build an investment pot of over £500,000. Someone starting in their early 20s could have an impressive nest egg by the end of their 50s. At this point, they might then choose to shift focus and use dividend shares to create a second income stream.
Is this really possible? In theory, yes.
Something to consider
Take MP Evans Group (LSE:MPE), the Indonesian palm oil producer, as an example. Since April 2021, it’s experienced an average increase of 15.3% in its share price. This excludes any benefit from buying more shares using the group’s generous dividend. The stock’s currently (2 April) yielding 4%.
Of course, capital growth and dividends can’t be guaranteed. Indeed, the size of MP Evans’ crop is dependent upon weather conditions and how effective it is at controlling pests and disease. And the price it receives for its oil is determined on international markets, which can be volatile.
However, the group has an impressive track record of dealing with these challenges and — as a result of a 396% increase in earnings per share — has seen its dividend grow by 65% since 2012. To have kept pace with inflation, its 2012 payout would need to have increased to 11.66p by 2025. But it’s done much better than this. Last year, it declared a dividend of 60p.
| Financial year | Dividend (pence) |
|---|---|
| 2012 | 8.00 |
| 2013 | 8.25 |
| 2014 | 8.25 |
| 2015 | 8.75 |
| 2016 | 15.00 |
| 2017 | 17.75 |
| 2018 | 17.75 |
| 2019 | 17.75 |
| 2020 | 22.00 |
| 2021 | 35.00 |
| 2022 | 42.50 |
| 2023 | 45.00 |
| 2024 | 52.50 |
| 2025 | 60.00 |
And I see no reason why this shouldn’t continue.
Strong prospects
The global market for palm oil — the world’s most traded vegetable oil — is currently worth around $70bn. And it’s forecast to grow significantly over the next 10 years.
| Organisation | Forecast global palm oil market size 2035 ($bn) |
|---|---|
| Grand View Research | 114.0 |
| Future Market Insight | 119.1 |
| Market Research Future | 129.8 |
To take advantage, the group continues to plant more hectares. It also emphasises the sustainable nature of its product and works with local co-ops to maintain good relations.
However, despite its above-average dividend and recent strong share price performance, the stock flies under the radar. With an attractive 2025 earnings multiple of 9.2, I think the market has yet to price in its full potential.
Of course, it wouldn’t be sensible to have a portfolio of just one stock. But I think MP Evans could be considered by an investor looking to build long-term wealth — using a well-diversified Stocks and Shares ISA — with the eventual aim of creating a dividend income stream.
It’s one example of a UK-listed company that quietly goes about its business and has consistently delivered above-average shareholder returns.
