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Aiming for a second source of income is never a bad idea. There are many ways to try to do this, from property to government bonds. However, as an experienced stock investor, I think the stock market is one of the best ways. By using an ISA, an investor can increase their dividend potential, providing a source of income. This is how.
An ISA can be a great tool as it allows an investor to maximize net income from dividend payments. What I mean by this is that dividends received within an ISA are not subject to dividend tax. So the gross amount of the company's payment is all ours. While this may not seem like a big deal, when we compound income payments over years, it really is a huge advantage.
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. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
A second income like this can be earned by choosing stocks with dividends that are sustainable in nature. It doesn't make much sense to pick a stock that has an incredibly high yield just because the share price is falling rapidly. In that case, the dividend could be cut in the near future, causing a drop in yield. Rather, investors can look for stocks with generous yields. But you should look for those who have a good payment history over several years.
A reliable payer
An example of this is Invertec (LSE:INVP). He FTSE 250 The bank has a current yield of 6.47% and has a history of continuously paying dividends for more than two decades.
The strong performance is not due to the falling share price. Rather, the share price is up 8% over the last year. It has benefited from interest rates staying high for longer. This has meant that its net earned interest income has not fallen as expected, with the latest half-year results showing that it was actually up 2% compared to the same period last year. Apart from that, the 13% increase in fee and commission income from the sale of financial products to private and corporate clients helped boost profitability.
As long as the business remains profitable, I don't see the dividend being threatened. One risk is increasing expected credit losses. Expected impairment charges in the latest report were £66.9m, up from £46.3m a year earlier.
Breaking down the numbers
An investor could consider building a portfolio of sustainable stocks like Investec with an average combined return of 6.5%. The results could be impressive. If they invested £750 a month and reinvested the dividends over 15 years, the pot size could reach £229.6k. This means that in the following year, you could generate £14.9k in income, averaging £287 per week.
Care must be taken not to rely too much on forecasts. But this strategy has good long-term potential for income generation.
