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Some investors use a Stocks and Shares ISA specifically to focus on dividend investments. This isn’t a bad move, specifically when the ISA is being used to target a passive income for the years to come. Given the tax-efficient wrapper the ISA provides, compounding long-term returns is possible. Here are the numbers when it comes to trying to reach £1k a month in income from the portfolio.
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.
Thinking outside the box
There are three main levers I can toggle to aim for £1k in monthly passive income. One is the timeframe involved, the other is the average yield, and the final one is the amount of money invested.
Let’s start with the timeframe. If an investor receives dividends and reinvests them, they now have more money in the stock. This means that next year, more income should be obtained, as they have a larger shareholding. If this continues over many years, the income will be higher. Put another way, the longer the time horizon, the more likely it is to reach the £1k goal.
The average dividend yield of a portfolio depends significantly on the investor’s risk tolerance. For example, the average yield of the FTSE 100 is 3.32%. However, with some active stock selection, I think this can be increased to around 6.5% without taking excessive risk. The higher the yield, the faster the income will build up.
Finally, let’s talk money. The ISA would need £184.6k in it to reach a £1k monthly income with a 6.5% yield. An ISA has a maximum annual investment limit of £20k. If someone had the money to utilise this every year fully, they would be able to reach the goal faster than someone who could only afford to put in £1k a year.
Tweaking all the levers is very much an individual thing. For instance, investing £12k over a year at a 6.5% yield would take just over a decade to reach the goal.
An income idea
If we put the numbers to one side, the other important factor in this strategy is finding good shares that fit the bill. One stock worth considering is Londonmetric Property (LSE:LMP). The real-estate investment trust (REIT) has a dividend yield of 6.35%, roughly in line with the target yield.
The trust is focused primarily on logistics real estate. Its portfolio is heavily weighted toward distribution warehouses, urban logistics hubs, and essential retail. These are sectors that benefit from structural trends such as e-commerce, supply-chain resilience, and inflation-linked rental agreements.
Those factors alone make it appealing for income investors. If a business is linked to long-term trends, it makes it more likely that the dividends will be sustainable. Further, by having contracts that increase with inflation, it protects the real power of the money being paid as a dividend.
Some might flag up concerns about a weaker commercial property market due to the pandemic. Yet, the company has deliberately shifted away from offices and non-core assets over recent years to become a specialist logistics REIT.
One risk is that high inflation could mean interest rates stay higher for longer. As the company often uses some debt to finance new projects, this could increase costs as debt funding becomes more expensive. But I still see it as one that’s worthy of further research.
