Considering a retirement ISA? Here’s how investors can aim for £2,000 a month in dividend shares

By reinvesting returns in equity shares until retirement, investors can work toward a solid second income.

Average payouts make these stocks very attractive for compounding returns. By using a dividend reinvestment plan (DRIP), the payments go back into the pot. Over time, these small contributions can lead to big growth!

Also, with a Stocks and Shares ISA, UK residents can invest up to £20,000 a year without paying any capital gains tax.

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.

Choosing the right share

Ideally, I look for stocks with a long track record of dividend growth. There are quite a few FTSE 100 shares that meet those criteria.

Here are a few examples off the top of my head British American cigars again Diageo. Both are reliable components of my dividend income portfolio.

These stocks are known as Dividend Aristocrats for building a reputation for consistently rising dividends. Once they have gained such fame, they are reluctant to lose it, so they do everything possible to keep their struggle going!

The dividend hero

I just added a resource group Severn Trent (LSE: SVT) in my retirement portfolio. With the exception of two small drawdowns, it has been increasing its dividends consistently for over 20 years at an average rate of 3.8% per year.

As a partner resource group National Gridits services are likely to remain in high demand. That makes it immune to market downturns, which is reflected in a stable share price.

It has a lot of debt though, which is dangerous. If it can’t reduce this soon, it may become insolvent and have financial problems.

Last year was difficult, and the share price fell by 2%. But revenue, earnings and profit margin all increased as of its latest earnings call, so things are looking up. Moreover, it has been able to increase its profit which is the important thing I am looking for.

The yield now stands at a moderate but sustainable 4.5%.

It gives consideration

Buying the top 10 stocks with the highest returns seems like an obvious choice, right? It’s wrong.

Yield alone doesn’t tell you much about a stock’s credibility. Yields can change rapidly and benefits can be terminated or reduced at any time.

For example, at 4.8%, i City of London Investment Trust it has a smaller yield than most. However, it has 58 years of consecutive dividend growth under its belt. That’s why I believe it makes an excellent addition to my profit portfolio.

I also carefully select some high-yielding but reliable stocks, such as Legal & General. It is currently trading below fair value which means the yield has risen to 8.7%, making it attractive.

Estimating returns

With a combination of yields between 4% and 10%, it is possible to achieve an average yield of 7%. One can also estimate another 3% to 4% of the profit from pricing.

£10,000 invested in a portfolio with those averages could grow to £183,500 over 30 years. It will pay around £12,000 in dividends per year.

That’s not bad. But adding another £100 each month can balloon it to £388,000. That will pay annual dividends of £25,000 – more than £2,000 a month.

Now that would be a decent addition to the pension.