A Stocks and Shares ISA is a brilliant way to build a second income stream, from a portfolio of dividend-paying FTSE 100 shares.
Investors may not need the income today, but it doesn’t matter. They can reinvest every shareholder payout back into the stock, to turbo-charge growth. Then draw it as passive income when they retire.
This year’s annual deadline it’s just a few days away, at midnight on 5 April. So investors who want to secure this year’s £20,000 allowance shouldn’t hang around.
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Securing the ISA allowance
Investors shouldn’t panic if they aren’t sure which shares to buy though. They can park money in their Stocks and Shares ISA as cash. They’ll earn a spot of interest while making their picks.
They shouldn’t leave it there too long though, money works harder in equities than cash, albeit with more short-term volatility.
Spreading money across a range of dividend stocks reduces risk. Even strong companies can cut their payouts, so diversification helps keep passive income flowing.
To generate £1,200 income from £20k, the ISA would need an average 6% dividend yield. That’s achievable, by building a balanced portfolio around a dozen or so dividend stocks, which could include fund manager Schroders (LSE: SDR). This, coincidentally, yields exactly 6% a year.
Schroders’ a top income stock
Schroders actively manages global investment funds, yet in recent years is own share price hasn’t done particularly well.
It’s down 4% over 12 month,s but lately it’s sprung to life, jumping 15% in the last three months. Even after this rise, the Schroders share price looks decent value, with a price-to-earnings ratio of 13.5, slightly below the FTSE 100 average of around 15 times.
Dividend cover’s a bit thin, at 1.2 times earnings, but it’s expected to rise to 1.4 this year, suggesting greater sustainability. Meanwhile, operating margins are forecast to increase from 21.6% to 25.4%, a positive trend.
Don’t forget the dividends
Schroders does face challenges. The rise of passive index-tracking ETFs has made life harder for traditional fund managers. Volatile markets haven’t helped either.
Full-year results, published 6 March, showed profits falling 3% to £640.5m, amid higher costs and lower performance fees.
Assets under management rose 4% to £778.8bn though, and statutory pre-tax profits jumped 14% to £558m.
The board also outlined a three-year plan to attract new business and cut costs. It aims to save £150m annually, with £20m already delivered in Q1.
FTSE 100 income star
The 14 analysts covering Schroders produce a one-year price target of 407.4p, implying a 14% increase from today’s price. Throw in the 6% yield would deliver a 20% total return including dividends. Not bad though of course, nothing’s guaranteed.
Well I think Schroders is worth considering for more experienced investors, those less confident should maybe take a look at FTSE 100 income stocks like Aviva, Lloyds Banking Group, British American Tobacco and National Grid. They’ve done better lately.
While the market remains unpredictable, a diversified dividend-focused Stocks and Shares ISA may offer a realistic way to build a high-and-rising second income over time.
