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UK stock market investors love to make the best of their Stocks and Shares ISA allowance. This is because the rules provide for up to £20,000 a year invested with no tax levied on the capital gains.
That can amount to some serious savings later in life. For instance, with 10% average returns on a portfolio, an ISA could save £2,000 a year!
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.
But before we get ahead of ourselves, let’s start small.
A fiver a day
Stashing five quid away each day may seem like a small amount but it all adds up. Within a year, that’s £1,825 saved! When invested in a well-diversified portfolio inside an ISA, that money can be put to work.
Consider a portfolio that returns the historical average of 10% (which isn’t guaranteed and returns can be much lower). By investing just £1,825 per year and compounding the returns, the pot could grow to £38,324 in 10 years.
That’s almost double the amount invested!
But it’s not a life-changing amount just yet. With a meagre £1,000 drawn down per month, it would barely last three years. Serious returns may require more time.
After 20 years, the compounding returns really kick in. At that point, it could have grown to £137,000 — assuming the average returns held. Just two years later and it would be over £170k.
At that point it would be almost large enough to convert to a dividend-based income portfolio. With an average yield of 7%, a £172,000 portfolio could bring in £12,000 a year in passive income.
So what UK stocks are worth considering when aiming for stable dividend income?
Here’s one I like.
HSBC
HSBC (LSE: HSBA) is the largest bank in the UK and one that investors have long-trusted for growth and dividends.
The stock’s yield fluctuates between 6% and 7%, often delivering some of the highest dividends in the UK banking sector. It’s hit some snags in the past — a reduction in 2008 and 2019 — but generally the dividend grows each year.
A recent restructuring under new CEO Georges Elhedery could help save £1.2bn by streamlining operations and enhancing efficiency.
But as always, risks are ever present. The restructuring could cost £1.42bn in severance costs alone, potentially impacting short-term profits. Plus the current geopolitical situation doesn’t help, leading HSBC to consider splitting operations east to west.
That could invite a whole host of new risks into the fray.
Results-wise, it’s been doing well lately. In 2024, its pre-tax profits reached a record £25.5bn with net profit of £18.1bn, a 2.2% increase from the previous year. It also announced a £1.5bn share buyback programme, reflecting loyal commitment to its shareholders.
Asset allocation
HSBC is just one great dividend stock to consider. Others include Legal & General, British American Tobacco and BT Group. It’s also good practice to include some defensive shares like AstraZeneca or Unilever.
A well-diversified portfolio ideally has a mix of assets, including ETFs, commodities and investment trusts. This helps protect against a single point of failure, keeping the portfolio steady during uncertain economic periods.
