If an investor puts £750 a month into a Stocks and Dividends ISA, here is the income they could have over 10 years.
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The ISA limit on Dividends and Dividends of £20k per annum appeared unharmed in the latest Budget. Indeed, it will remain at that level until 2030, providing the opportunity for tax-free income for years to come.
But even small numbers can bring home the bacon. Here, I’ll look at how much income can be made by putting £750 a month – or £9,000 a year – into an ISA for the next 10 years.
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.
Instant gratification
I think there are two main approaches an investor can consider taking here. The first is direct where the income will be taken regularly and built up over time.
For example, the dividend forecast for British American cigars (LSE: BATS) next year is 246p per share. This means that the annual yield for April 2024 is 8.2%.
What this means in practice is that an investor can buy £750 worth of shares now to understand around £61 in dividends next year.
After 10 years of such returns, assuming no capital gains or losses, the final balance of the portfolio would be £90,000. And by then it will be paying £7,380 in annual income.
Now, this figure assumes a fixed yield of 8.2%, which is unlikely to be the case in reality. Monthly market fluctuations can cause share prices, and therefore yields, to vary.
More than one egg in the basket
In addition, relying on just one stock for income is very risky. Benefits are not guaranteed. And while British American Tobacco has an excellent track record of increasing its shareholder payouts, it also faces fewer smokers on average around the world.
The company’s strategy relies on increasing the price of cigarettes, while investing heavily in developing leading smokeless brands such as Wake up (breathing) and Velo (oral nicotine pouches). If any part of the strategy fails, the current profit may not be sustainable in the long term.
Delayed gratification
The second method would involve reinvesting any gains received. In other words, buying more shares is taking the income out of the account to spend (that can happen later).
A £9,000 ISA yielding 8.2% would pay £737 a year in dividends. At British American Tobacco’s current share price (just under £30), that would be enough to buy an extra 24 shares. These will then pay an additional £59, and so on.
The advantage of such a strategy is that it will supercharge the wealth building process over time.
| A year | Additional Interest | The balance |
|---|---|---|
| 1 | £338 | £9,338 |
| 2 | £1,442 | £19,442 |
| 3 | £3,374 | £30,374 |
| 4 | £6,203 | £42,203 |
| 5 | £10,002 | £55,002 |
| 6 | £14,851 | £68,851 |
| 7 | £20,835 | £83,835 |
| 8 | £28,047 | £100,047 |
| 9 | £36,590 | £117,590 |
| 10 | £46,570 | £136,570 |
The sum after 10 years would be £136,570, not £90,000. And the annual passive salary could be higher, at £11,198. That’s almost £4,000 a year compared to not replanting!
Worth considering
I should mention that I bought British American Tobacco shares for my portfolio in March at 2,386p. So I’m up 25% so far, without having to put in dividends (the stock was yielding about 10% at the time).
There are risks, as highlighted earlier. But tobacco stocks continue to look undervalued to me, making them a potential option to consider for a diversified ISA. That is given if it is consistent with the investor’s morale.
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