How much would someone need in an ISA to target £308,538 annual dividend income?

Today (5 April), marks the end of the tax year and the deadline for someone looking to take advantage of the £20,000 annual Stocks and Shares ISA limit. It’s been 27 years since the popular investment product was launched. Since then, holders have been able to enjoy all income and capital gains tax-free.

But is it really possible to generate a £300,000+ annual income? I reckon it is. In fact, there’s evidence to suggest that some investors are earning this – and more — right now. Let’s take a closer look.

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.

Astonishing numbers

A Freedom of Information request has revealed that there are 3,080 ISA millionaires in the country. The 25 largest ISAs are worth an average of £10.98m.

If this amount was invested in the FTSE 100, which is currently yielding 2.81%, it would produce dividend income of £308,538 a year.

But I reckon it’s possible to do better than this. For example, the FTSE 250’s offering a return of 3.4%. Even more impressively, there are 79 stocks on the FTSE 350 yielding 5%+.

The figure for the FTSE 100’s top 10 is 7%. This would generate income of £768,600 on a £10.98m Stocks and Shares ISA.

Some inspiration

Numbers like these are exceptional but not impossible to achieve. For example, someone investing £20,000 a year in an ISA could create an investment pot worth over £1.1m in 20 years, assuming a growth rate of 9%.

Indeed, there are several stocks — including Microsoft, Amazon, and Apple — that are widely credited with creating multiple millionaires among its shareholders. While it’s impossible to know for sure, I think it’s reasonable to assume that many have done very well from owning shares in these companies given their huge growth in recent years.

One piece of analysis that I’ve seen estimates that Nvidia (NASDAQ:NVDA) has made 27,000 of its workforce (dollar) millionaires, largely through stock options. Could those joining the world’s most valuable company today achieve a similar result?

More to come?

Well, the group’s clearly integral to the artificial intelligence (AI) revolution. In fact, without Nvidia continuing to supply its essential chips, I doubt the sector will be able to contribute up to 14% ($15.7trn) to global GDP by 2030, as predicted by The World Economic Forum.

However, the war in the Middle East could disrupt some of the anticipated growth. With cheap energy and lots of land, the region is the ideal location for data centres. Indeed, Saudi Arabia, the United Arab Emirates, and Qatar are investing heavily.

Also, away from the region, higher interest rates due to rising inflation could make the construction of data centres more expensive. Any slowdown in the sector and Nivida would be badly affected.

However, the stock’s currently trading on around 24 times forward earnings, which is cheap for a high-growth tech stock. Analysts reckon it’s 60% undervalued and, amazingly, 69 out of 70 brokers covering the company are recommending their clients buy some of its shares.

I suspect a modest investment in Nvidia today is unlikely to make someone a millionaire. However, due to its critical importance to the AI industry, strong pipeline of new products, and high profit margins, I expect its share price to continue to grow steadily. On this basis, I think it’s a stock to consider. 

The post How much would someone need in an ISA to target £308,538 annual dividend income? appeared first on The Motley Fool UK.

More reading

• £10,000 invested in Nvidia stock 1 year ago is now worth…
• 3 reasons why AI could cause a brutal stock market crash
• With a P/E of only 22, is Nvidia actually a top value stock?
• 18% off its peak, is Nvidia stock now attractively priced?
• 2 S&P 500 tech titans to consider for a Stocks and Shares ISA 

James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon, Apple, Microsoft, and Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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