I have a Stocks and Shares ISA because I like the idea of earning money from doing very little. How? Well, lots of UK companies pay dividends and these are distributions of profit to shareholders.
They can be thought of as a ‘thank you’ for investing.
But let’s assume someone wants to retire at 55 and live off dividends equivalent to half the UK’s average (median) salary. Is it really possible to target an annual passive income of £16,455, equivalent to £1,370 a month? I think so.
Let me explain.
The biggest and best
Some of the most reliable dividend payers can be found on the FTSE 100. But there are significant variations. The yield on the index as a whole is 3.1%. However, there are currently (7 June), 13 paying 5% or more. In fact, eight are returning at least 6%.
With a portfolio of dividend shares yielding 5%, a Stocks and Shares ISA of £329,100 is going to be needed to produce an income of £16,455 a year. At 6%, this drops to £274,250.
But how could someone go about building an ISA worth this much? Let’s see.
Some numbers
During the 20 years to April, the FTSE 100 generated an average annual return of 6.4%. This assumes dividends were reinvested buying more shares.
An individual who invested £5,000 a year and achieved a growth rate of 6.4%, would build a Stocks and Shares ISA of £308,863 after 25 years. To achieve our target annual income of £16,455, a portfolio of dividend shares paying 5.3% would be needed.
We’ve seen there are plenty of FTSE 100 stocks offering attractive yields at the moment but there are many more elsewhere on the UK stock market. In fact, there are 127 on the FTSE All-Share index yielding 5.3%+.
It pays to shop around
One I have in my ISA is Supermarket Income REIT (LSE:SUPR). It owns a £2.1bn portfolio of large grocery stores in the UK and France which it lets to blue-chip tenants on long-term leases.
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It’s currently offering a yield of 7.5%. Owning £308,863 of its shares would generate dividends of £23,165 a year. However, as attractive as this might sound, it’s important to hold a diversified portfolio of shares.
That’s because dividends are likely to fluctuate in line with earnings. This potential volatility means payouts never come with any guarantees. Indeed, Supermarket Income’s profit could come under threat if interest rates remain higher for longer – it had £980m of borrowings at 31 March – and if it struggled to lease one or more of its properties.
A good track record
However, since listing in July 2017, Supermarket Income REIT has increased its dividend every year:
- FY18 – 5.50p
- FY19 – 5.63p
- FY20 – 5.80p
- FY21 – 5.86p
- FY22 – 5.94p
- FY23 – 6.00p
- FY24 – 6.06p
- FY25 – 6.12p
- FY26 – 6.18p (current target)
Also, it’s never had a bad debt and it currently enjoys a 100% occupancy rate. Crucially, I believe grocery stores are here to stay. Whether people shop in-store or online, large supermarkets remain an essential part of the sector’s business model.
For these reasons, I believe Supermarket Income REIT’s an excellent dividend share to consider for those wanting to boost their passive income.
Should you invest £5,000 in Supermarket Income REIT Plc right now?
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James Beard owns shares in Supermarket Income REIT.
