Investing in a Stocks and Shares ISA is a brilliant way to generate a regular monthly income stream to supplement my earnings while Iâm working and my pension after I retire.
All my income is entirely free of tax for life inside the ISA wrapper, as are my capital gains. Better still, I can use it to invest in my favourite income-generating asset class of all, FTSE 100 shares.
Land of dividends
London-listed blue-chips pay some of the highest dividends in the world. The index currently yields 3.5% a year, more than double the S&P 500 yield of 1.57%, and this is now forecast to rise to 4.2%.
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In practice, I will aim to generate a higher income than 4.2% by investing in individual stocks rather than tracking the entire index. Some top FTSE 100 companies offer amazing yields right now, and better still, many of them look really cheap.
In practice, the two often go together. Yield is calculated by dividing the dividend per share by the share price, so if the stock falls, the yield automatically climbs. A high yield can be a sign of a company with problems, so I would research my stock picks carefully before clicking the buy button and aim to hold for a minimum 10 years to give management time to sort out any problems.
To hit my £125 monthly income target in year one, I would need an average yield of 6.25%. A quick look at todayâs FTSE 100 reveals a dozen companies yielding 6% or more. Here are five that spring out.
Mining giant Anglo American yields 6.44% yet trades at just 6.2 times earnings (a ratio of 15 times is normally seen as fair value). Insurer Aviva yields 7.33% and recently rewarded loyal shareholders with a £300m share buyback too.
Good value, high income
Fund manager M&G yields a staggering 9.56%. Its earnings plunged last year due to global stock market volatility but management says the cash will flow this year. Dividends are never guaranteed, so this one is risky, but I think worth it.
I also fancy housebuilder Barratt Developments, which yields 7.38% and trades at six times earnings. I donât buy tobacco companies, but if I did Iâd find the 7.18% yield from Imperial Brands irresistible. Itâs also cheap trading at just 7.4 times earnings.
If I split a £20,000 ISA equally between these five stocks, investing £4,000 in each, I would secure an average yield of 7.58% a year. That would give me income of £1,516 in year one, which works out at £126 a month.
Today I would reinvest that income back into my portfolio for growth. With luck, by the time I retire, my dividends could be worth a lot more.
Naturally, there are risks. Any of my stock picks could slash or suspend their dividends at any time. Their share prices could crash, reducing my capital. They could even go bust, in extreme circumstances.
I would get round this by steadily investing in an ISA year after year, building up a portfolio of 15 stocks rather than five. So if one or two disappoint, the rest will hopefully compensate.
The post How Iâd use a £20k Stocks and Shares ISA to target a £125 regular monthly income appeared first on The Motley Fool UK.
Like buying £1 for 51p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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Harvey Jones has positions in M&G Plc. The Motley Fool UK has recommended Imperial Brands 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.