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I don’t know anyone who would refuse a second income of £4,000 a month. And while all investment strategies carry some risk, I think the best way to target a return like this is to open an ISA and buy as many dividend shares as you can afford.
One of the primary advantages of an ISA is that income can be earned tax-free. This means those dividend-paying stocks don’t attract the attention of HMRC. In turn, this can make them a more lucrative way to target a passive income compared to some other investment vehicles.
But ISAs can be a good home for growth shares as well. That’s because capital gains also escape the clutches of HMRC.
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.
With a typical annual return of 8%, the stock market has enormous wealth-building potential. No wonder Stocks and Shares ISAs have proved so popular since being launched in April 1999.
But how much would be needed in a tax-efficient ISA for a regular £4,000 income? Let’s find out.
Crunching the numbers
For annual dividend income of £48,000, an ISA would have to be worth £648,649, assuming a yield of 7.4%.
That’s the return currently (30 January) on offer from Phoenix Group Holdings (LSE:PHNX), the FTSE 100 savings and retirement group. Although few will probably be familiar with its existing name, it will soon re-brand as Standard Life.
The group’s progressive dividend policy means its 2024 payout was 13.7% higher than in 2020. And with its strong cash flow there could be more to come. According to Goldman Sachs, the group has a 14% cash generation yield versus 10% for the sector as a whole.
There could also be the added bonus of some share price growth, with momentum building over the past couple of years. Although the stock’s ‘only’ risen 10% since January 2021, it’s now 67% higher than in October 2023.
Opportunities and threats
Like the rest of us, a stock market correction (or worse) could affect its investment income. That’s because it needs to hold lots of equities and bonds to help meet its obligations.
Another potential issue is that the group operates in an increasingly competitive market. Also, if interest rates fall as anticipated then it could affect its annuity business, which has been a contributor to its recent growth. To compensate, it offers other retirement products as well.
At the moment, the group retains a strong balance sheet. This ensures it comfortably meets the solvency requirements set by industry regulators.
Over the longer term, an ageing population and increased emphasis on retirement self-sufficiency should help the business expand and support growth in its dividend.
With the second-highest yield on the FTSE 100, I think Phoenix Group’s a stock to consider. When combined with some other quality dividend heroes in a well-diversified portfolio, I think it’s possible to generate a very healthy second income.
