Investing £20,000 in a Stocks and Shares ISA isn’t going to generate enough passive income to retire in comfort. But it’s a big step in the right direction. Given time, I reckon it could give me income of more than £2,000 a month. Here’s how I see that working.
Most of my portfolio is in FTSE 100 shares. All of my dividend income and share price growth is free from tax in a Stocks and Shares ISA. HMRC can’t touch it.
Why I buy direct equities
Rather than simply plonking money in a FTSE tracker, I buy individual stocks in the hope of beating the market. It’s risky, but potentially more rewarding over time. I already hold around 20 stocks. I could diversify by purchasing another five or so using this year’s £20k ISA.
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There are no guarantees when investing. I can’t say how well my stock picks will fare. However, over the longer run, the FTSE 100 has delivered an average annual return of more than 7%, with all dividends reinvested.
If I kept my £20k in the market for 30 years, and reinvested every dividend, that 7% compound return would turn it into £152,245. That’s an increase of 661%.
However, if I could up that return to 10% a year through careful stock picking, I’d have a thunderous £348,988. That’s a fabulous 1,645% growth.
I’ve double checked these figures because I couldn’t believe them. They show the value of investing money to compound and grow for the long term.
In my bid to outperform, I’m buying stocks like FTSE 100 insurer Phoenix Group Holdings (LSE: PHNX). Today, this offers a scarcely believable dividend yield of 10.18%, the highest on the blue-chip index.
The sheer scale of that income will set alarm bells ringing. The big question is whether Phoenix can afford to keep paying that much money to shareholders every year. Also, a high yield could be the sign of an ailing share price, and that’s the case here.
Unbeatable dividend income today
The Phoenix share price is down 28.94% over the past five years, although it is up 9.91% over the last 12 months.
Recent years have been tough on stock markets, with the pandemic, energy shock and cost-of-living crisis. Phoenix manages around £290bn on behalf of its 12m customers, to cover its insurance liabilities, so it’s on the front line of recent stock market volatility.
Its shares may show a bit more zip over time while the dividend looks sustainable as the group generates plenty of capital. I’m reinvesting every penny today but will take this as income when I retire. Along with dividends from my other ISA holdings.
If this year’s £20k ISA was ultimately worth £348,988 in 2054 and yielded 7% a year, I’d get an annual income of £24,429. That’s more than I originally put in and works out as a stunning £2,036 a month.
Well that income would buy less than it would today, due to inflation, it’s still well worth having. Plus I’ve got next year’s ISA allowance to invest. And the next one.
