£287 a week? Here’s how an investor can use an ISA to build additional income
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Pursuing a second source of income is never a bad idea. There are many ways to try to do this, from real estate to Government bonds. But as an experienced investor, I believe that the stock market is one of the best options. When using an ISA, an investor can increase their earning potential, providing a source of income. Here is the way.
An ISA can be a great tool as it allows an investor to maximize the return on dividend payments. What I mean by this is that the benefits earned within an ISA are not subject to dividend tax. So the total payment amount from the company belongs to all of us. While this may not seem like a big deal, when we compound the income payments over the years it is a really big benefit.
Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
A secondary income like this can be made by choosing existing dividend stocks sustainable in nature. There is little point in picking a stock with an insanely high yield because the stock price is falling quickly. If so, the dividend may be cut in the near future, causing the yield to drop. Instead, investors can look to target high yield stocks. But they should look for those who have a good history of paying it back over several years.
A reliable payer
Another example of this Investec (LSE: INVP). I FTSE 250 paid a dividend of 6.47% compared to the previous trading day.
The strong yield is not due to a drop in share price. Instead, the stock price is up 8% over the past year. It has benefited from persistently high interest rates. This means that earned interest income is not falling as expected, as the latest half-year results show that it actually increased by 2% compared to the same period last year. In addition, a 13% increase in revenue and revenue from the sale of financial products to private and corporate customers helped boost profits.
As long as the business continues to make a profit, I don’t see profitability as being at risk. Another risk is the increase in expected credit losses. Expected impairment charges in the latest report were £66.9m, up from £46.3m a year earlier.
Breaking down the math
An investor can consider building a portfolio of sustainable shares such as Investec with an average yield of 6.5%. The results may be positive. If they invested £750 a month and reinvested dividends for 15 years, the pot size would reach £229.6k. This means that over the next year, it could generate £14.9k in income, an average of £287 a week.
There is a need for caution in placing too much faith in predictions. But there is a good long-term opportunity to generate income in this strategy.
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