A Stocks and Shares ISA can be a tax-efficient vehicle to invest money for both growth and income. In fact, I do just that.
Part of my investments target growth, and some target regular dividend payments. And several combine the two and aim for growing dividends.
One day I’d expect to use my ISA purely as a way to earn second income, so many of my investments will likely target a strong dividend yield.
But until then, I’m happy having a selection of varying styles.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Growing an ISA
Before I get to my ‘retirement’ stage, I need to build a sizeable pot. I’ve already started but if I began from scratch, here’s what I’d do to earn a five-figure second income.
It’s important to realise that earning £25,336 from dividends would likely require a pot worth over £300,000. Further, it’s unrealistic for it to come from a single year of investing £20,000.
That said, just five years of maximising my Stocks and Shares ISA could be enough to reach my goal. Allow me to explain. The average long-term stock market return’s around 8-10%. I calculate that by investing £20k a year for just five years, I’d own a pot worth around £122k.
That’s still far off my target, so how could I push it past the £300k mark? Well, the magic ingredient to this recipe is time. With no further investment, I could leave my ISA to continue to grow for the next 10 years.
If it sounds like a long time, I’d say the goal of achieving over £25,000 in annual income without lifting a finger’s worth it.
Note that I could reduce the time it takes by continuing my contributions. I calculate that 10 years of £20k investments would be sufficient to reach my target too.
Which stocks to buy?
As a long-term investor, I want to own companies that can stand the test of time. I want them to exist and thrive over the coming years.
That means they should hold a competitive advantage that prevents peers from taking market share from them. I’m also looking for businesses that can sufficiently grow sales and earnings over time.
One share at the top of my list is FTSE 100 aerospace firm Rolls-Royce (LSE:RR.). This share’s had its ups and downs over the years. The pandemic was a major challenge as global travel slowed to a crawl, but things have markedly improved since then.
A new CEO launched a multi-year transformation programme to make the business more resilient and competitive. It’s part way through but so far, it’s made significant progress.
The results from the changes are appearing in the bottom line now too. Profits are higher, and profit margin’s grown.
One word of caution though. Its share price has gained over 130% in the past year so I’d need to question whether much of its recent progress is already factored into the price.
As it recently raised its guidance for 2024 and restarted its dividend for the first time since the pandemic, I’d say there could be more progress to come.
The post How I’d invest £20k in a Stocks and Shares ISA for a £25,336 second income appeared first on The Motley Fool UK.
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Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
