Aiming for a second source of income is never a bad idea. There are many ways to try and do this, ranging from property to Government bonds. Yet as an experienced stock investor, I believe that the stock market is one of the best ways. When using an ISA, an investor can boost their dividend potential, providing the source for income. Here’s how.
Using the right tools
An ISA can be a great tool as it allows an investor to maximise the net proceeds from a dividend payment. What I mean by this is that dividends received within an ISA aren’t subject to dividend tax. So the gross payment amount from the company is all ours. Even though this might not seem like a big thing, when we compound income payments over years it really is a big advantage.
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.
A second income like this can be made by picking dividend stocks that are sustainable in nature. There’s little point in selecting a stock that has a crazily high yield that’s only because the share price is falling rapidly. In that case, the dividend might get cut in the near future, causing the yield to drop. Rather, investors can look to target stocks with a generous yield. But they should look for those where there’s a good track record of paying it out over several years.
A reliable payer
One example of this is Investec (LSE:INVP). The FTSE 250 bank has a current yield of 6.47% and boasts a record of continuously paying dividends for over two decades.
The strong yield isn’t due to a falling share price. Rather, the stock price is up 8% over the last year. It has benefitted from interest rates remaining higher for longer. This has meant that its net interest income earned hasn’t fallen as expected, with the latest half-year results showing it actually increased by 2% versus the same period the previous year. Aside from that, the 13% rise in fee and commission revenue from the sale of financial products to private and corporate clients helped to boost profitability.
As long as the business continues to be profitable, I don’t see the dividend as being under threat. One risk is the rising expected credit losses. The expected impairment charges in the latest report were £66.9m, up from £46.3m from the year before.
Breaking down the figures
An investor could consider building a portfolio of sustainable stocks like Investec with an average blended yield of 6.5%. The results could be impressive. If they invested £750 a month and reinvested the dividends for 15 years, the pot size could reach £229.6k. This means that in the following year, it could generate £14.9k in income, averaging £287 a week.
There’s a need to be careful in putting too much faith in forecasts. But there’s good long-term potential for income generation in this strategy.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
