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A Stocks and Shares ISA can be a tax-efficient tool for some investors to use when aiming to grow wealth from the market. Yet given that dividends are also received in the ISA without having to pay tax, it can be a good way to grow a passive income stream as well. If an investor had a target of banking an extra £100 a week, here’s how it could play out.
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Setting expectations
Targeting an average income payment of £100 a week works out at £5,200 a year. Straight away, I can see that to generate this kind of income, an investor would need to have a portfolio worth tens of thousands of pounds. Of course, a large lump sum could be invested straight away to generate this.
Yet for many of us, having that sort of money lying around isn’t realistic. Therefore, an investor could look to regularly put a smaller amount to work and build the pot over time.
The other factor is how quickly the money can compound. Based on the available dividend yields of large-cap stocks, I think it isn’t unreasonable to target a 6% yield over time. When the dividend gets paid, this money can be used to buy more of the same stock.
If we assumed an investment of £400 a month with an average yield of 6%, it could take just over a dozen years to have a portfolio worth £86.7k. From there, it could generate an average of £100 a week in income.
Targeting specific ideas
The portfolio would need to be filled with reputable dividend stocks with yields around the 6% mark. One idea for consideration could be PayPoint (LSE:PAY). It currently has a dividend yield of 5.85%, with the share price down 3% in the last year.
The UK-based company provides multichannel payments and retail services infrastructure. It mainly makes money from transaction fees charged when people use its payment channels, along with commissions charged for retailers using the service. As a result, it’s a fairly steady revenue stream. As long as people keep paying for goods and services, PayPoint can make money.
I think the dividend’s sustainable. From a business perspective, the shift toward digital payments and e-commerce is only going to continue. This offers PayPoint more growth and higher margins, helping offset declining revenues from older cash channels.
Further, the company isn’t stretched when it comes to paying out income at the moment. The dividend cover ratio’s 1.5. Any number above one indicates the current earnings per share can completely cover the dividend being paid. As a result, this isn’t putting a strain on cash flow, which is a good sign.
One risk is that the business is tied to the broader economy. If we see a slowdown in spending due to consumer financial concerns, it could see revenue and profit fall for PayPoint.
Overall, I think PayPoint’s an option for investors to consider who are looking to implement the dividend strategy.
