The beauty of investing inside a Stocks and Shares ISA is that every single penny of dividend income and share price growth is entirely free from tax.
An extra £675 a month may not sound life-changing, but it works out at £8,100 a year, enough to make a serious difference to retirement finances. Especially since you don’t have to pay tax on it, regardless of what you earn elsewhere.
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.
Why is the dividend yield so important?
So how much would an investor need tucked away in an ISA to target that level of income? The amount required depends on the average yield generated by the investments held.
- At a 4% yield, an investor would need £202,500 invested.
- At a 5% yield, the required sum falls to £162,000.
- At a 6% yield, the target drops to £135,000.
Those are sizeable amounts, but not impossible to reach for somebody investing steadily over many years. A diversified portfolio of income-producing shares could help get there. Some individual stocks yield more than 6% or 7%, although higher yields often come with higher risks.
One dividend stock that regularly catches the eye is British American Tobacco (LSE: BATS). It’s got a reputation as an income machine. Some investors won’t go near Big Tobacco, including me, but that’s a personal choice. Those who are happy to invest have been richly rewarded over the years.
Smoking rates may be declining, especially in the West, but British American Tobacco’s recent revenues have remained remarkably resilient:
- 2025: £25.61bn
- 2024: £25.87bn
- 2023: £27.28bn
- 2022: £27.66bn
- 2021: £25.68bn
It’s managed this by using its brand power to take a bigger share of a shrinking market, and developing alternative nicotine products such as vapes, heated tobacco, and nicotine pouches. For an income stock, the shares have delivered a lot of capital growth lately. They’re up 29% over the last year and 57% over five. The combination of the two can really help your wealth compound and grow over time.
Today, the trailing yield stands at solid 5.2%, while the shares trade on a modest price-to-earnings ratio of 12.9. That valuation doesn’t look excessive to me, especially given the company’s ability to generate cash and reward shareholders. Management still expects revenues to rise by between 3% and 5% in 2026, despite the continued squeeze on traditional cigarette sales.
What risks should I consider?
Governments remain hostile to the industry. Higher taxes, tighter regulations, and marketing restrictions are constant threats. If vaping health concerns grow, lawmakers could clamp down on alternative nicotine products too. British American Tobacco group recently absorbed an $8bn hit linked to a long-running Canadian class action lawsuit. That’s a lot of money. Further legal challenges can’t be ruled out.
For those comfortable with the sector and the unique risks it brings, British American Tobacco remains one of the market’s most powerful income generators. It’s worth considering for long-term income and growth. All of it tax-free in an ISA.
Should you invest £5,000 in British American Tobacco P.l.c. 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 British American Tobacco P.l.c. made the list?
Harvey Jones does not hold any positions in the companies mentioned.
