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I’m sure most people would welcome the opportunity to earn extra income. I certainly do. That’s why I have a Stocks and Shares ISA. Most of my positions are in income shares on the FTSE 350. I try to buy those that pay steady and reliable dividends. But I don’t withdraw the cash and use it to treat myself. Instead, I prefer to reinvest the money received into buying more shares. This is known as compounding and – if all goes to plan — it means it’s possible to grow a portfolio more quickly. However, when it comes to shareholder returns, it’s impossible to provide any guarantees.
I usually stick to UK companies because they’re known to me and I find it easier to follow their performance. And due to their balance sheet strength, the 350-largest listed companies in the country should be better able to withstand any shocks.
Passive income
According to the Office for National Statistics, the average UK wage (before tax) is currently £722 a week. Although not everyone’s tax position is the same, this is likely to provide a net income of £587 a week (£30,524 a year) for most people.
One of the benefits of investing in an ISA is that all income is earned free of tax.
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.
But to determine how much is needed to generate £30,524 each year depends on the return. At the moment (10 October), the FTSE 350 is yielding 3.29%. An ISA would therefore need to be worth £927,701 to produce income equivalent to the UK’s current average annual salary.
This is a large sum. But over a lifetime of investing, it’s possible to get close. It’s estimated there are over 4,000 ISA millionaires in the country. They took an average of 22 years to reach seven figures.
However, there are plenty of shares offering an above-average return. For example, there are currently 13 FTSE 350 stocks yielding in excess of 9%.
One option
My favourite is Legal & General (LSE:LGEN).
Based on amounts paid over the past 12 months, it’s currently yielding 9.1%. It last cut its payout during the 2008/09 financial crisis. The directors have pledged to increase it by 2% a year from 2025 to 2027.
And I’m optimistic that this can be supported by future earnings growth. The group recently announced that it’s now managing over £200bn (a UK record) of defined contribution scheme assets. It’s attributed its success to “strong net inflows, product innovation and [a] focus on excellent client support”. The group’s also acquired the £1.6bn BP Pension Fund. In addition, annuity sales are benefitting from the higher interest rate environment.
However, the industry is a competitive one with challenger brands snapping at its heels. And with over £500bn of investments on its balance sheet, it’s vulnerable to a market downturn.
But with the state retirement age increasing, it’s operating in an industry that’s likely to grow over the coming decades. It also has a healthy balance sheet with over twice the level of reserves that it’s obliged to hold from a regulatory perspective.
However, it’s the dividend that most attracts me to the stock. That’s why I own it and why others could consider adding it to their own portfolios. Hopefully, my faith will be rewarded later in life when my ISA’s generating a healthy level of income.
