The Stocks and Shares ISA wrapper is a rewarding way to build a tax-free income from dividend-paying FTSE 100 shares. Investors who reinvest dividends over the years can create a high-and-rising second income stream without handing a penny of it to the taxman.
One question every ISA investor faces is this: how much do I need in my pot to generate a decent income in retirement?
What target should I set myself?
Here, I’ve decided to set a target income of £25,094. That’s equivalent to double the maximum new State Pension, currently £12,547 a year. Combined, that would lift the investor’s total income to a handy £37,641. And the vast majority would be tax-free.
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.
How much capital you need to generate that £25,094 will depend on the yield generated by your ISA portfolio.
- At a 4% yield, an investor would need roughly £627,350.
- At 5%, the total falls to around £501,880.
- At 6%, the figure drops again to roughly £418,233.
In my view, a brilliant way to get there is to build a spread of FTSE 100 stocks offering both share price growth and dividend income. One stock I rate right now is NatWest Group (LSE: NWG). It’s now one of the market’s standout income shares.
The banking sector has benefited from higher interest rates, improving profitability and a steady recovery in investor confidence. NatWest’s profits have ratcheted up nicely:
- 2025 — £7.7bn
- 2024 — £6.2bn
- 2023 — £5.6bn
- 2022 — £5.1bn
- 2021 — £3.8bn
As a result, the NatWest share price has surged 190% over five years, although the rate of growth has slowed lately. It’s up a modest 14% over the last 12 months. Dividends are on top though, and they’re now incredibly generous.
NatWest has a trailing dividend yield is 5.4%. That should steadily climb as management has committed to a progressive dividend policy. Analysts expect the yield to hit 6% this year, then rise to 6.5% in 2027. Reinvesting dividends will help the total return compound and grow over the years.
Is this FTSE 100 stock right for me?
As with every stock there are risks. Rising inflation and unemployment are a worry, as this could hit mortgage demand and increase bad debts. NatWest is almost entirely focused on the UK, so can’t make up for weakness at home by expanding overseas.
There are also political risks. A cash-strapped chancellor could be tempted to slap more windfall taxes on FTSE 100 banks. Voters would probably approve. Yet I think these challenges are reflected in NatWest’s price-to-earnings ratio, currently a modest 8.8.
I think NatWest is well worth considering for long-term investors seeking both regular income and growth. I wouldn’t bank on the stock rising quite as rapidly as it has done in recent years though.
Future returns will come from dividends as much as growth. But with a long-term view, I think it’s a brilliant way of generating a passive income stream, tax-free in an ISA. That’s why I bought NatWest last month. I’m tempted to buy more.
Should you invest £5,000 in NatWest Group Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if NatWest Group Plc made the list?
Harvey Jones owns shares in NatWest
