For almost every investor, making passive income is a benefit. The ability to earn money without having to lift a finger allows you to be more productive spending time doing other things. One way many try to achieve this is through buying stocks that pay out dividends. When the investments are housed within an ISA, the benefits of reinvesting the income from dividends, along with compounding, can help some to become an ISA millionaire.
For example, let’s say you invest £1,000 per month into stocks paying out 7% per year. Assuming the share price grows on average at 5% per year, then in 30 years you’d have reached ISA millionaire status. The process is sped up as you won’t be paying tax on the capital growth, or on the dividends that are reinvested. Of note, the first £1,000 you invest would be worth almost £30,000 at the end of the 30 years alone!
ISA millionaire dividend stocks
So now that we know it’s possible, which stocks should we buy to help us begin? The first one I like is Jupiter Fund Management (LSE: JUP). It sits within the FTSE 250, and is a financial services provider. More specifically, it’s the holding company for various investment funds (some of which you may be invested in yourself).
Jupiter acknowledges that investors buy into the listed company mostly for income. That is why the firm has a payout ratio of 50%. This means that half of the net profit is paid out as a dividend. This is quite high, but income investors won’t be complaining. Currently, the dividend yield sits at 7.2%. Although a special dividend for this year has been cancelled, the full-year dividend was paid last month. This bodes well for the normal mid-year dividend to continue to be paid.
High yield, high risk?
The second stock that I feel is worth evaluating is Airtel Africa (LSE: AAF). The dividend yield on the stock is 8.5%, making it one of the highest within the FTSE 250. The telecommunications firm recently celebrated its 10th birthday, although its tenure as a listed company has been far shorter. With operations mainly in Africa, some UK-based investors may be unsure whether they’d want to invest. The high dividend yield may be flagged as one factor hinting at its high risk.
Looking at the payout ratio as we did for Jupiter, we find that the Airtel ratio from last year was only 20%. I’d say that’s fairly conservative. So if the firm can deliver an 8.5% dividend yield by paying out only 20% of profits to investors, there’s a strong argument to be made that the dividend is sustainable. Even if the business sees a slowdown in profitability this year, it would only need to increase the payout ratio marginally to be able to maintain the nominal dividend per share figure.
For me, both Jupiter and Airtel merit an investment on the basis of the dividend yields. By putting both investments in an ISA shelter, and by investing regularly, it would put you well on your way to becoming an ISA millionaire.
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Jonathan Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.