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There are more than 4,000 Stocks and Shares ISA millionaires in the UK, and they should be able to retire in comfort. But even if we don’t aim so high, we can still plan to generate a decent bit of annual income to boost our pensions.
Over the past 20 years, we’ve seen an average FTSE 100 return of 6.9% a year, including share price gains and dividends. To keep the calculation as simple as possible, I’ll base it on all returns coming from dividends for this example.
Let’s go with the 7% forecast from British American Tobacco (LSE: BATS), which is close enough for an estimate.
Long-term future?
The future of tobacco is clearly uncertain. And that does highlight something key. Whichever companies we choose for our Stocks and Shares ISA, each one will carry its own individual risks.
It’s essential to try to balance those risks by going for diversification in our choices. I don’t think the tobacco industry is likely to be wiped out, but what if it is? Something like BP should be immune to that.
But what about the end of hydrocarbons and the world getting back on course for renewable energy? I doubt that would do much harm to Lloyds Banking Group. But hang on, there’s that car-loan mis-selling thing… So maybe consider adding… well, you get the picture.
With a careful selection of stocks from across the sectors, I reckon we could approximate the overall market risk with very little stock-specific danger above that.
So what’s it worth?
Back to British American. A 3 June update said it’s on track for full-year expectations, with revenue guidance raised a little. The company reiterated its plan for a “progressive dividend and sustainable share buybacks.” We should see about £1.1bn in buybacks in 2025.
That boosts my confidence in the reliability of those dividends, at least in the near to medium term. Let’s see what the calculations say.
Suppose we invest a full ISA allowance of £20,000 in British American Tobacco. We then get 7% in dividends each year and use it to buy more shares. It could all build to a pot of £77,400 after 20 years. And 7% of that is more than enough to then get us our £5,000 income per year.
We don’t all have £20,000 to put down in one go. But most of us should be able to invest smaller sums at regular intervals.
Less, but more often
A much lower £5,000, but repeated every year for 20 years, could soundly beat that. We’re talking a result of £212,000 after 20 years, more than twice the capital invested. An annual 7% dividend could then mean close to £15,000 a year, without touching the capital.
The secret, then, is to invest as much as we can regularly for as long as we can. And be sure to diversify to reduce the risk. And then start dreaming of a nice retirement holiday.
