How much income could I make if I invest my full £20,000 Stocks and Shares ISA allowance?
It’s a tax-efficient way to invest, and any income I take from it would be tax-free. So it makes sense to use as much of the allowance as I can.
Over the past 10 years, annual Stocks and Shares ISA returns have hit an average of 9.6%.
I think a lot of people look at share price charts and see them looking bad, and they forget about dividends.
Record dividends
Analysts suggest FTSE 100 dividends should reach £84.8bn this year. That’s close to the all-time record set in 2018. And they think we should see a new record in 2024.
If I can invest the full £20,000, a 9.6% return would see my nest egg grow by £1,920 per year on average. It will vary a lot from year to year, mind.
Someone who could manage the full £20k every year could end up with more than £300,000 in their ISA after 10 years, if they reinvest all their all dividends every year.
Dividends alone?
This is total returns. And if I wanted to take income from my ISA, I wouldn’t want to have to sell any shares. So what might I manage just from dividends?
There are some big dividend yields among FTSE 100 stocks right now. Asset manager M&G, for example, is on a forecast yield of 9.8%.
A full £20,000 ISA invested in M&G would pay £1,960 per year. Well, if the yield stays the same. And putting a whole annual allowance into one stock could be very risky. So no, I’d want to diversify my ISA.
More big dividends
There are penty of big dividends that I could diversify into. The Legal & General forecast, for example, shows an 8.3% yield. And that could pay me a nice £1,660 per year.
At British American Tobacco, we’re looking at a forecast yield of 8.5%. And that could get me an even better £1,700 per year.
Even Lloyds Banking Group, with its 5.2% dividend, could pay me £1,040 per year.
£1,500 per year?
What would I need to hit my target of £1,500 per year from a single £20,000 ISA? I’d need an annual return of 7.5%. And I reckon that might just be realistic.
All of these are just illustrations based on today’s forecast dividend yields. There’s no guarantee they’ll keep up so well.
And the past decade might have been especially good for Stocks and Shares ISA returns, with future decades doing less well. So I can’t make any predictions.
Future outperformance
I am convinced of one thing, though. I reckon Stocks and Shares ISAs will continue to wipe the floor with Cash ISA returns in the long run.
So, I’ll sum up my strategy for earning a passive income stream for my retirement. The trick, I reckon, is to use as much of my annual ISA allowance as I can. And put it in top-quality FTSE 100 stocks paying good dividends.
Oh, and buy more shares with the dividend cash while I build up the pot.
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.
