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The Stocks and Shares ISA is brilliant way to build a reliable income stream for later life. I’m using the tax-free wrapper ISA to buy a spread of FTSE 100 dividend-paying shares with the hope of turning their regular dividends into a meaningful second income when I finally stop working. The older I get, the more important my ISA feels.
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Working out the income target
A weekly income of £250 works out at roughly £13,000 a year. To see how large an ISA might need to be, I start with dividend yield. That’s the amount of income paid out each year as a percentage of the share price. It varies wildly from stock to stock, and nothing is guaranteed, but it gives a useful starting figure.
The FTSE 100 offers an average yield of around 3.25% today. To get £250 a week from that yield, an investor would need £400,000. Personally, I think we can do better. With careful stock selection, it’s possible to generate a much higher average yield of 5%, which would shrink that target to £260,000 a year. If an investor really went for it and yielded 6%, they only need around £217,000.
FTSE 100 dividend star
Investment markets move in cycles. Some sectors fall out of favour, only to re-emerge stronger later on. Real estate investment trusts (REITs) like LondonMetric Property (LSE: LMP) have been through a tough spell lately. Sluggish economic growth made things harder for tenants, while working from home clipped demand for offices. The cost-of-living squeeze and e-commerce shift dented shopping centre footfall.
That backdrop helps explain why LondonMetric, which specialises in logistics centres, retail parks, and leisure, has struggled lately. The share price has risen just 2% over 12 months and is still 16% lower than five years ago. Even so, there are positive signs. Interest rates are expected to fall as inflation eases, and that could support both asset values and profitability across the sector.
The company’s half-year update, published on 7 October, was encouraging. LondonMetric expects net rental income to rise 14% to £219m. Occupancy remains high at 98%, lease lengths average 17 years, and rent collection sits at 99.4%. The board increased the dividend again, marking its eleventh straight year of growth.
Building for the future
As a REIT, it must distribute most of its rental profits as dividends. The current trailing yield of 6.2% is generous, although the price-to-earnings ratio of 18.5 suggests the shares aren’t a screaming bargain. For investors who understand the model, LondonMetric could be one to consider buying, but only after investigating the risks I’ve mentioned above.
However, investors just starting out should consider household names like Aviva or Lloyds Banking Group, while they get the hang of dividend investing.
Investing is a long game, and reliable wealth comes from steady contributions, sensible diversification, and time in the market. With that combination, a Stocks and Shares ISA capable of generating £250 a week becomes far more achievable. And when retirement arrives, it’s potentially life changing.
