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The deadline for this year’s Stocks and Stocks ISA is fast approaching. UK investors have until April 5 to use their £20k tax-free ISA allowance for this year.
Tax-free allowances for dividends and capital gains will drop dramatically starting in April 2023. As a long-term investor, it makes sense for me to take advantage of the tax shelter an ISA provides.
My approach to investing is to inject cash into my account every month. My goal is to turn my ISA into a dividend machine that provides me with a reliable second income. This is how I’m doing this.
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 form of tax advice. Readers are responsible for carrying out their own due diligence and obtaining professional advice before making any investment decisions.
keep it simple
I’m not trying to be too smart. I only want to buy good, proven businesses that are consistently profitable, with a track record of steady growth, and reliable dividends to help me build my savings.
For this reason, most of the stocks I would look at are from the FTSE 100 and the FTSE 250 indices.
For example, legal and general and fan both have been in business for over 100 years and offer dividend yields of over 7%. Tobacco is not everyone’s cup of tea, but british american tobacco and imperial marks both yield over 7% and seem pretty safe to me.
Elsewhere, I am drawn to the defensive qualities of consumer goods companies like Unilever (3.8%) and health values such as GSK (4%).
I have also been fully involved in the banking sector, with a recent purchase of NatWest Group (6.1%). In my opinion, UK banks look like pretty safe investments these days.
Crunching the numbers
My plan is to continue to drip feed some of my earnings into my ISA each month until I can retire. While I’m still working, I reinvest all the dividends I receive. By using them to buy more shares today, I hope to increase my future income as I benefit from the power of compounding.
To explain how I expect this to work, I’ve put together some example numbers.
The average annual return on UK stocks since 1900 is around 9% per year. That is the conclusion of a recent report from swiss credit. The returns vary greatly from year to year, of course. But I based my sums on this figure because I look at a long time frame.
With a monthly investment of £350, I estimate my ISA could be worth around £355,000 after 25 years.
Using a standard withdrawal fee of 4%, that could give me an income of £14,200. That’s 50% more than the current state pension of £9,628.
My strategy will not necessarily suit everyone. But overall, I think the tax-free benefits of an ISA mean it’s a great way to get started in the stock market today.
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