I think the best use of my Stocks and Shares ISA allowance is to generate a second income to secure myself a comfortable retirement.
I will do this by investing in the shares of individual FTSE 100 stocks, targeting those that pay some of the most generous yields. I will favour companies with a good track record of increasing shareholder payouts every year, as this should give me a rising income, over time.
I’m after top dividend stocks
Obviously, there are dangers to this strategy. Dividends are not guaranteed and can be cut if a company runs into trouble. I aim to get around this by investing in a minimum of 15 different shares, to spread my risk.
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If I had £20,000 to invest in a Stocks and Shares ISA before the 5 April deadline, and was targeting a monthly income of £100 in year one, I would need to generate a yield of 6%.
I couldn’t do that by investing in a FTSE 100 tracker, because the index currently yields too little, at 4%. My £20,000 would only generate income of £800 a year, or £67 a month.
That’s still a good return, especially since that income will rise over time. But I reckon I can do better today.
A quick glance at constituent members of the index shows that a string of stocks already yield more than 6%. I’m looking at fund manager abrdn (6.30%), insurer Aviva (6.47%), general insurer Admiral Group (7.44%), housebuilder Taylor Wimpey (7.96%), and telecoms giant Vodafone Group (7.98%).
Even better, these stocks operate across a range of different sectors, giving my £20,000 ISA portfolio instant balance. If I split my money equally between all five of them, investing £4,000 in each, I would easily hit my income target. A crude calculation suggests my yield would be 7.23%, giving me £1,446 annually, or £120 in monthly passive income.
I can beat my income target
I’m a bit wary about Vodafone, whose dividend is only covered 1.1 times by earnings, and I might substitute that with, say, fund manager M&G, which yields a stonking 8.34%. Before I buy any of these stocks, I will pore over their recent reports and trading statements to search for both opportunities and threats.
I’m particularly keen to check whether my stock picks will continue to generate sufficient cash to provide a smooth supply of growing dividends year after year.
My 7% passive income target is only for the first year. As my chosen companies steadily hike their dividends (with luck), and I reinvest them back into my portfolio, both the capital value of my portfolio and the passive income stream it produces should rise over time.
Retirement is still 15 years away. If my £20,000 ISA delivered a total average return of 7% a year, it would be worth a pretty decent £55,181 when I started to draw the dividends as income. If it still yields 7% at that point it will generate income of £3,863 a year, or £321 a month.
As ever, there are no guarantees, but I still think that’s a pretty good potential reward for one year’s worth of Stocks and Shares ISA investing.
