My Stocks and Shares ISA is a great way for me to invest in a tax-efficient manner. For example, when trying to build a source of second income, any stock that I own that pays a dividend won’t be eligible for dividend tax. I have an allowance of £20k each year to invest in the ISA.
So if I was just starting out now, here’s how I’d build up my portfolio. The building blocks Having an empty ISA to begin with isn’t a disaster. Even if I don’t have any savings, my aim would be to free up some cash flow from my monthly income and expenses.
The beauty of an ISA is that I don’t have to invest the full £20k at once. I can put in as much or as little as I’m comfortable with each month (or even more frequently if I want). The aim of generating high levels of over time is to bank on the compounding effect.
This refers to growing my investment at a faster pace by reinvesting dividends over time. For example, let’s say I put £1,000 in a stock that has a dividend yield of 5%. When I get paid the £50 dividend, I buy more of the same stock.
Then I have £1,050, which in theory would pay me £52.50 in the next year. Over time, this compounds.
My steps of going from zero to something are as follows. I either cut back on expenses or boost my income to free up cash each month. I invest this money in good quality dividend stocks.
When I receive the dividend, I buy more of the same stock. This compounds in coming years, at which I can make a call on when to start enjoying the i.