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A grand and a half isn’t what it used to be, and in future won’t be what it is today. But if that much were generated in passive income each month, totalling £18,000 per year, that will certainly make retirement more comfortable for most.
What’s more, this income would be tax-free inside a Stocks and Shares ISA, and the same goes for any capital gains. Few things in investing are genuine no-brainers — I’ve learnt that the hard way — but I would say an ISA is.
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.
Compounding
How I see it, someone has basically two routes to aim for that £1,500 a month from an ISA portfolio in retirement.
There’s the 4% withdrawal rule, which suggests an investor can safely withdraw around 4% a year without (in theory) running out of money. To get to £18,000 a year, they would need roughly £450,000 invested.
Then there’s living off dividends (true passive income). In this case, an investor doesn’t need to sell shares because the portfolio throws off enough dividends to pay £18,000 a year.
Neither approach is perfect. The 4% rule isn’t really passive income, as it depends on selling down the portfolio gradually. And while the second strategy leaves the capital intact for loved ones, it relies solely on dividends, which are never guaranteed.
In reality, most retirees will probably mix the two. They’ll take dividends as they come, as well as small withdrawals when needed (ideally when markets are high).
The £450,000 could be reached by investing £500 a month for 25 years. This assumes an 8% average return, with dividends reinvested to fuel compounding magic.
High-quality assets
One UK stock I think is worth digging into is 3i Infrastructure (LSE:3IN). This FTSE 250 investment trust has controlling stakes in 11 assets across Europe and the UK. These include green energy service providers and fibre communications network firms.
The top portfolio position is Belgium’s TCR, which is the largest independent lessor of airport ground support equipment. It operates in more than 230 airports across 20 countries, and most readers have probably encountered its kit. Think aircraft stairs, baggage carts nipping about, and those tractors that push or tow planes.
Now, one thing to note here is that the portfolio is quite concentrated, with TCR accounting for around 16.5% of it. The second-largest holding — Denmark’s ESVAGT, which supplies service vessels to the offshore wind and oil and gas sectors — also has a meaty 15% weighting.
If any of these key holdings ran into trouble, this might be a problem.
However, these assets have tended to generate reliable cash flows. And since going public in 2007, 3i Infrastructure has served up a 14% annualised net asset value (NAV) total return. So it has a fantastic long-term record.
Last year, the trust hiked its dividend by 6.3%. And it expects a similar rise this year. The forecast dividend yield is around 4%, and the shares are trading at a 9% discount to NAV.
To my mind, there’s decent value on offer here. I think it could help contribute towards the 8% target return inside a diversified ISA.
