Getting to the point where I’m earning a big tax-free second income from my portfolio is going to take time. That’s because the Stocks and Shares ISA contribution limit is currently £20,000 a year.
So even if I maxed this out, my yearly passive income stream would be £1,200 from a 6%-yielding portfolio. While that would come in handy for Christmas presents, it’s hardly what I’d call huge.
Therefore, I’d take the long view when it comes to passive income. I’d give up bits and bobs from dividends and aim to build up my portfolio over time.
If I had nine grand to invest in an ISA today, I’d consider the following FTSE 100 trust as a starter stock.
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.
Hunting for outliers
Scottish Mortgage Investment Trust (LSE: SMT) aims to invest in the world’s greatest growth companies on behalf of shareholders. Its investing strategy is very long-term and differentiated.
For example, it has owned shares of Swedish industrial group Atlas Copco since 1995. And it has held Amazon, ASML and Tesla for over a decade.
These have all been fantastic stocks to own across a long period of time.
Scottish Mortgage’s mission to find the big winners of tomorrow has taken it deep into private markets too.
The trust now has around 26% of its portfolio allocated to unlisted assets, including SpaceX, which recently put the largest and most powerful spacecraft ever into orbit.
This does add an element of uncertainty, however, because these private companies are harder to put an accurate value on. Once they go public, they could get seriously marked down.
Of course, they could also increase in value, which is why the trust is invested in them.
The ‘YouTube of audio’
One portfolio holding I find very interesting is Spotify (NYSE: SPOT). Scottish Mortgage first invested in the music streaming platform back in 2015 when it was still a private company.
The trust says Spotify is reshaping the music industry, giving “artists access to unparalleled data analytics…[It] can do what the labels did for artists, but with more data, at a lower cost and without making any demand on copyright ownership.”
Of course, we know the company faces formidable competition in the shape of Apple and Amazon. These tech juggernauts are competing for the same music streaming subscriptions.
Yet Spotify now has 602m monthly active users and 236m paying premium subscribers. It has bundled audiobooks into the premium package, which I’m personally getting great value from as a subscriber. And it may bundle in more stuff (including podcasts) over time to keep listeners loyal.
It’s quickly becoming the YouTube of audio, and the market has started paying attention. I have too and the stock is on my watchlist.
Passive income plan
By investing my cash in a collection of UK stocks like Scottish Mortgage, I think it’s entirely realistic to aim for an average 9% annual return.
Naturally, this isn’t guaranteed. It could be less (or more) over time.
But if I was able to achieve this rate of return, £9,000 invested every year — the equivalent of £750 every month — would become £510,880 after 20 years.
At this point, I could restructure my portfolio around dividend stocks collectively yielding 6%, which would pay me a £30,652 yearly second income.
