Passive income earned through a Stocks and Shares ISA can be enjoyed tax-free. On a pound-for-pound basis, this means dividends are likely to be more attractive to a greater number of people than employment income.
But how big would an ISA need to be to start producing a second income of £125 a month? Okay, this might not be a small fortune. But I reckon it’s enough to provide a few treats and would be a nice addition to an individual’s salary or retirement. Let’s explore.
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A bit of maths
With a return of 3.1%, an ISA worth £48,387 would be needed to meet our income target of £125 a month, equivalent to £1,500 a year.
Why such a precise number? Well, this is the current (1 June) yield of the FTSE 100.
The UK’s second tier of listed companies does better. It’s yielding 3.65%.
However, not all stocks are created equal. Some pay much more generous dividends than the average. Others pay nothing at all.
Let’s take a closer look at the FTSE 100. Here, 23 stocks pay 4% or more. With this level of return, an ISA worth £37,500 would be needed to produce £125 a month.
At 5%, the ISA would have to be valued at £30,000. Of the UK’s largest listed companies, 13 have a historical yield of 5%+.
Better still, seven pay at least 6%. A £25,000 Stocks and Shares ISA returning 6% would meet our target. The average of these is 6.8%. With a return like this, to produce dividends of £1,500 a year, our investment pot would need to be worth £22,059.
The greater the passive income you can build, the freer you will become
Self-made millionaire investor Todd M Fleming
Is this realistic?
Of course, there can never be any guarantees when it comes to dividends.
Doing business is difficult. Indeed, there are all sorts of problems that need to be overcome. And there’s a myriad of issues that could affect a company’s earnings and its payout. Sometimes, there’s nothing that can be done. In these circumstances, companies will often batten down the hatches and weather the storm hoping for brighter skies to return soon.
That’s what happened to Land Securities Group (LSE:LAND) during the pandemic. Its portfolio of shopping centres understandably saw a huge drop in footfall and demand for its offices fell as more people started to work from home. This double whammy led to a cut in its dividend.
A resilient business
However, things are very different now. Its dividend has been gradually restored to 88.7% of its 2019 level. And it’s currently yielding 6.4%.
An investment of £23,438 in its shares would generate dividend income of £125 a month. Assuming no disasters, a 6.4% return would see an investor double their money in just over 11 years, from dividends alone. No guarantees, of course.
With its relatively high debt levels, the group remains vulnerable to interest rates staying higher for longer. Tenants going bust is another potential challenge.
However, the group has a high-quality portfolio and enjoys a 98% occupancy rate. Its loan-to-value doesn’t seem stretched and it wants to boost its rental yield by substituting some of its offices for residential properties.
Set alongside its excellent dividend track record, I think it’s an exciting passive income stock to consider.
Should you invest £5,000 in Land Securities Group Plc right now?
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James Beard does not hold any positions in the companies mentioned.
