It’s possible for ordinary private investors to generate a passive income that’s big enough to transform their retirement. Even better, it can all be entirely free of tax, if you do it by investing in a Stocks and Shares ISA. So what’s the magic ingredient?
Actually, I’d say there are two. A popular way to build a second income for later life is to invest in a spread of FTSE 100 shares. They bring their own brand of magic, by rewarding investors in two ways. First, by building your capital as their share prices rise, and second, by offering a passive income stream via regular dividends.
How much income can I build from £20,000?
Neither income nor growth is guaranteed. There’s always an element of risk involved when buying equities. It’s why investors should aim for spread of at least a dozen, and hold for the long term. And the second source of magic? Time.
The ideal moment to start investing in the stock market is always the same. Today. Because the longer your stocks and reinvested dividends have to compound, the more you should end up with. Hanging around for the perfect time to invest doesn’t work. It’s best to get stuck in, then stay with it.
Let’s say an investor was able to rustle up the full £20,000 annual Stocks and Shares ISA allowance this year then leave it invested for 30 years. Let’s also assume that their money grows by 9.64% a year, which is the average annual return on a Stocks and Shares ISA over the last decade, according to advisory group Unbiased.
At that end of that, they’d have a staggering £316,301. Remember, they put in just £20k. Compound growth made up the remaining £296,301. That certainly looks magical to me. Now let’s also say they generated a 5% yield on that. It would give them £14,815 a year, without touching their capital. And free of tax.
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.
None of this is guaranteed. They might get more, they might get less and an average 5% yield is pretty high.
How NatWest shares can build wealth
One FTSE 100 stock I rate right now is NatWest Group (LSE: NWG). In fact, I’ve bought it on two occasions in the last couple of months, and might buy it again.
All the big banks have done well over the last few years, and NatWest is no exception. Its share price is up 40% in the last year and a staggering 222% over five. That’s the kind of performance you might expect from a US tech stock. But there’s one thing most techies won’t offer you, and that’s dividend income. By contrast, NatWest shares are forecast to yield 5.4% this year, which could rise to 6.1% in 2027.
I’m not suggesting NatWest shares can maintain their recent breakneck pace. At some point, they have to slow. It’s a UK-focused bank, and our domestic economy looks set to struggle for some time. Like all the high street banks, it also has to fight off constant pressure from smaller, hungrier challenger banks.
But with a modest forward price-to-earnings ratio of 9.3, I think it looks good value and well worth considering for both growth and income.
Should you invest £5,000 in NatWest Group Plc right now?
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Harvey Jones owns shares in NatWest Group.
