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Getting to the point where I'm getting a big second tax-free income from my portfolio will take time. This is because the stocks and Shares ISA contribution limit is currently £20,000 a year.
So even if I maximized this, my annual passive income stream would be £1,200 from a portfolio yielding 6%. While that would be useful for Christmas gifts, it's not what I would call huge.
Therefore, I would take a long-term view when it comes to passive income. I would forego dividends and try to grow my portfolio over time.
If I had nine thousand dollars to invest in an ISA today, I would consider the following FTSE 100 trust as an initial action.
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any type of tax advice.
On the hunt for outliers
Scottish Mortgage Investment Trust (LSE: SMT) aims to invest in the world's fastest growing companies on behalf of shareholders. Its investment strategy is very long-term and differentiated.
For example, he has owned shares in the Swedish industrial group. Atlas Copco since 1995. And has celebrated amazon, ASML and tesla for more than a decade.
These have all been fantastic stocks to own over a long period of time.
Scottish Mortgage's mission to find the big winners of tomorrow has also seen it delve deeply into the private markets.
The trust now has about 26% of its portfolio allocated to unlisted assets, including SpaceX, which recently launched the largest and most powerful spacecraft ever seen into orbit.
However, this adds an element of uncertainty, because it is more difficult to give an exact value to these private companies. Once they are made public, they could be seriously discounted.
Of course, they could also increase in value, which is why trust is invested in them.
The 'YouTube of audio'
A portfolio that I find very interesting is Spotify (NYSE: PERIOD). Scottish Mortgage first invested in the music streaming platform in 2015, when it was still a private company.
The trust says Spotify is reshaping the music industry, providing “artists access unparalleled data analysis…(He) It can do what labels did for artists, but with more data, at a lower cost, and without requiring copyright ownership..”
Of course, we know that the company faces formidable competition in the form of Apple and amazon. These tech giants are competing for the same music streaming subscriptions.
However, Spotify now has 602 million monthly active users and 236 million paying premium subscribers. They have included audiobooks in the premium package, which I personally get great value as a subscriber. And you can include more material (including podcasts) over time to keep listeners loyal.
It is quickly becoming the YouTube of audio and the market has started to pay attention. I have it too and the stock is on my watch list.
Passive income plan
When investing my money in a set of UK shares like Scottish Mortgage, I think it is entirely realistic to aim for an average annual return of 9%.
Naturally, this is not guaranteed. It could be lower (or higher) over time.
But if you could achieve this rate of return, the £9,000 invested each year (the equivalent of £750 each month) would become £510,880 after 20 years.
At this point, I could restructure my portfolio around dividend stocks that together yield 6%, giving me a second annual income of £30,652.
