How can I choose share stocks to retire on a second income using my £20k ISA allowance

As I plan for my retirement, the idea of ​​a stable, profitable second income becomes more important. I enjoy the finer things in life so for a comfortable retirement, I need more than a basic pension scheme.

One way to try to achieve this is through investing FTSE 100 dividend stocks in a Stocks and Shares ISA. These stocks have the potential for both capital appreciation and a steady stream of income through dividends. Also, the benefits offered by an ISA allow British citizens to invest up to £20,000 a year tax-free on capital gains.

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.

Key profit metrics

When choosing stocks for my income portfolio, I often check the yield and payout ratio.

The yield is the percentage paid per share. For example, if a stock pays a dividend of £1 and its price is £20, the dividend yield is 5%. High yields can indicate attractive income opportunities, but they can also raise the company’s underlying risk if yields are too high relative to peers.

The payout ratio measures the portion of earnings that are paid out as dividends. A payout ratio of less than 60% is generally considered strong, indicating that the company is retaining enough cash to grow while providing returns to shareholders. Conversely, a very high payout ratio can mean that the company is expanding excessively to maintain dividend payments, which can be a red flag for investors.

Another thing to check is the ex-dividend date – especially if the company only pays dividends once a year. This is the payment date established by the company, after which new stock buyers will not receive the next dividend. To be eligible for the dividend, the investor must purchase the stock before this date.

A stock to consider

One stock that I think would make a great addition to a secondary income portfolio British World Team (LSE: BLND). This real estate investment trust (REIT) focuses primarily on commercial property but has a diverse portfolio of office, retail, and residential developments.

However, the housing market is very sensitive to economic downturns, which is a risk that should be considered. If an epidemic-like problem occurs again, the share price may increase. It also risks losing its market share to competitors like itself Taylor Wimpey again The Vistry Groupwhich can threaten its profits.

Despite a 40% price increase last year, the company reported a £1m loss this year. However, revenue is forecast to grow by 28% annually going forward and debt is well covered. I expect it will return to profitability soon.

It has been paying dividends for almost 30 years, rising from 9p per share in 2000 to 31p in 2019. However, the dividend was cut in 2020 and now stands at 22.8p per share. The yield is relatively high, at 5.3%. That would pay over £1,000 in dividends a year on a £20,000 investment. If I contribute £5,000 a year to an ISA and reinvest the dividends for 20 years, it will pay out over £21,000 a year. A decent second currency.

Overall, it looks like a reliable payer that goes up in tough economic times. As such, I plan to buy the stock once I have some money freed up next month.