Investing in an ISA for passive income is a great idea for long-term investors. I own one myself, and reinvest the dividends I receive to boost compound growth. When I retire, I can also look forward to making withdrawals without paying a penny in income tax.
How does a £6,493 monthly passive income in retirement sound to you? Pretty good, right? It doesn’t have to be a pipe dream, and here I’ll show you how.
High-yield heroes
When you’re investing for dividends, it’s natural to chase the highest-yielding shares out there. We all love the idea of getting the maximum bang for our buck, whether it’s when finding stocks to buy or doing the weekly shop. The greater the dividend yield, the more money an investor gets back for every pound invested.
I hold a large number of high-yield dividend stocks in my own portfolio. Legal & General (dividend yield: 8.7%), HSBC (5%), and Aviva (6.7%) are a few FTSE 100 shares with better-than-average yields I own today.
But just owning big-paying dividend shares can be an expensive strategy over the long term. This is because shares with enormous yields are often investor traps. The yield can often be high because the share price has slumped, signalling underlying problems with the business that can hit profits and dividends. In other cases, sky-high yields can be unsustainable over the long term, paving the way for income disappointment.
The real thing
For this reason, it’s important to consider companies that consistently grow their dividends as well. This strategy has other advantages, like providing an income that keeps up with or even exceeds inflation, and creating a wealth-building snowball effect as dividends steadily rise.
It’s why I’ve also added Coca-Cola HBC (LSE:CCH) shares to my portfolio. Today the soft drinks company’s dividend yield is 2.7%, below the broader FTSE 100’s 3.2%. But that doesn’t put me off — I’m more interested in the company’s record of 13 consecutive yearly dividend hikes.
What’s more, dividends have grown at an exponential rate, averaging 11.6% a year over the last decade.
So what makes Coca-Cola such an exceptional dividend grower? The answer lies in its market-leading brands, global reach, and strong pricing power, providing reliable cash generation. Every day, Coke is consumed an astonishing 1.9bn times by consumers worldwide.
Competition is fierce in its markets and poses obvious risks. However, with enormous market budgets and a great record of innovation, demand for its drinks still remains white-hot, even during economic downturns.
Making a £6k+ ISA income
Through a combination of dividend growth stocks like this and high-yield shares, I believe an annual ISA return of 9% is very achievable. At this rate, £20,000 invested steadily over the course of the tax year could create an ISA worth £1.1m after 20 years.
This would then generate a £6,493 monthly income if invested in 7%-yielding income shares.
