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There were over 4m Stocks and Shares ISA accounts in the UK at the end of the 2023-24 tax year. And a good chunk of these investors will be receiving tax-free passive income from dividend stocks listed on the London Stock Exchange.
By my count, there are over 50 shares across the FTSE 350 offering dividend yields above 6%. So the potential income on offer is far more enticing than a Cash ISA, especially when combined with the possibility of higher share prices. Neither’s assured though, of course.
Using the 6%-yielders
Some readers may be wondering why I’ve used the seemingly random headline figure of £766 a week. Well, this was the median weekly earnings for full-time employees in April, according to the Office for National Statistics.
Let’s assume that someone built a 10-stock portfolio yielding 6% from the wide selection of UK dividend shares on offer. How big would this ISA have to be to generate the current weekly median wage?
The answer’s roughly £664,000. A 6%-yielding portfolio of this size would throw off almost £40,000 each year in tax-free passive income.
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.
Different rates of return
With the annual ISA contribution allowance currently at £20,000, this tells us it’s going to take time to build towards that amount. How many years comes down to the amount regularly invested and the rate of return.
For someone starting with £10,000 who can afford to invest £500 every month, they’d reach the target in just under 26 years. This assumes a 9% return. Change the figures to £1,000 a year and an 8% return, it drops to less than 21 years.
Maxing out the ISA allowance each year with a lower 7% return? Just 17 years (though sadly, many people can’t afford to contribute the full allowance).
All figures assume dividends are reinvested to turbocharge the compounding process.
Insurance giant
One FTSE 100 dividend stock that I think merits serious consideration is Aviva (LSE:AV.). The company’s become an insurance giant after recently swallowing up rival Direct Line. The combined group now has over 21m UK customers, equivalent to around 4 in 10 adults!
As the chart shows, the stock’s been on fire over the past year, surging 47%. Yet despite this, Aviva’s still offering a forward-looking dividend yield of 6.1%. Only a handful in the FTSE 100 yield higher.
| Year | Dividend per share | Dividend yield (%) |
|---|---|---|
| 2024 | 35.7p | 5.3% |
| 2025 (forecast) | 38.70 | 5.7% |
| 2026 (forecast) | 41.5p | 6.1% |
Moreover, while dividends are never truly safe until they’ve landed in an account, the payout looks well-covered by prospective earnings. That’s because Aviva’s been performing very strongly, with first-half operating profit up 22% to more than £1bn.
Today we are the UK’s leading diversified insurer…We are very well positioned to accelerate growth in the capital-light areas of wealth, health and general insurance, and deliver more and more for our shareholders.
CEO Amanda Blanc.
By 2026, Aviva’s on track to generate £2bn in operating profit, but it’s open to even more capital-light acquisitions to target higher profits. That said, acquisitions aren’t guaranteed to pay off, and Direct Line was a big one at £3.7bn. A failure to realise the intended cost synergies is a risk.
Looking ahead though, I think the stock has more to give. I intend to keep reinvesting my dividends to buy more shares.
