Insights From ISA Millionaires: How To Generate £100k Of Annual Income From Your ISA

24th Mar '23 by Megan Boxall

17 comments 3512 reads

We are fortunate at Stockopedia to have a community of successful investors who have built portfolios worth more than £1m in their ISAs and kindly agreed to share their insights. In this series of articles we will explore their investment strategies and key lessons learned on how to pick stocks and manage risk when building a portfolio. Whether you are an experienced investor or just starting out, we hope that these interviews will provide valuable insights and inspire you to achieve your own investment goals.

Profile

Name: Jack (not his real name)

Job: Retired

Number of years as a private investor: Over 30

Portfolio Size: £1.1m

Investing Background: Jack worked for FTSE 100 consultancy firm Computer Management Group where he joined his company’s share scheme. When he retired in 1995, CMG was his one and only stock. The rest of his portfolio was in VCTs and EIS funds managed by professionals. Since retirement he has become a full time investor.

Investing Goal: To generate £100,000 of dividends from his ISA every year to boost his income and reduce the amount of time it takes to manage his portfolio.

Getting Started

There is no denying that building a portfolio of stocks and shares worth over £1m requires a certain degree of good fortune, whether that comes in the form of a well-remunerated job or a series of successful stock picks. But getting started early is key.

Jack says, “I’d been investing since 1972 in an employee share scheme - that was my original one and only share and it set me up.” While still working, he left the management of his portfolio to specialists where it was mainly invested in Venture Capital Trusts (VCTs) and Enterprise Investment Scheme (EIS) funds.

Then in the early 1990s when the Personal Equity Plan (PEP) - the predecessor of the ISA - was introduced in the UK he started contributing annually. Around the time he was thinking about retiring, one of the private companies he had shares in went public, cementing a gain which left him a good starting portfolio to build on in retirement.

Insight 1: It is never too early to begin building your portfolio

Hunting for growth

Jack’s approach to growing his portfolio might seem slightly haphazard. He has invested in funds and…

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khmkii

24th Mar '23

There is a mistake in this sentence: "What I am targeting is £100,000 out of my ISA every year. That’s a 5% return on £1m"

Michael_P

I thought that as well, but later it clarifies this is a target that hasn't been achieved yet. Last year it was £50k, and on track for £60k this year.

raigersfield

25th Mar '23

That 5% on one million is NOT £100,000……..

MichaelFBS

Surely what Jack is targeting is drawing 5% from an ISA valued at £2m rather than a return of 5% on a portfolio valued at £1m?

I do the same (target drawing 5%) all be it on a smaller portfolio size. I also acknowledge the inherent risks in targeting a particular drawings figure and a figure as high as 5%, when in general the literature would indicate that a 4% withdrawal rate is the very maximum safe level. And, though I wish (oh wishing) otherwise, I acknowledge that my portfolio is unlikely to double in all but the very long term at this withdrawal rate.

I would also question whether it is possible to draw 5% from a stock portfolio worth £x and at the same time grow that portfolio so that it becomes valued at £2x in a meaningful amount of time. This article:

https://www.hartfordfunds.com/...

points out that “Going back to 1960, 69% of the total return of the S&P 500 Index1 can be attributed to reinvested dividends and the power of compounding..”

One could invest the lot in Legal & General (LON:LGEN) and Aviva (LON:AV.) and other high yielding large caps and boost the dividend income to £85,000 (on a portfolio of £1m) but I am not sure that would be a strategy for the long term.

Regards

Michael

simoan

Hi Michael,

I agree. I found the maths in the article quite confusing and 5% sounds over ambitious, particularly when the pot has already shrunk by £500k. I have read that 4% is a Safe Withdrawal Rate but this relates to US based investments only. If you invest purely in the UK market the SWR is considered to be less (3-3.5%) because the FTSE has less growth historically.

However, my biggest issue with the article is that it states shares with a 5% dividend yield are less risky. I’m sorry, but that’s nonsense.

All the best, Si

jjis

Your withdrawal rate of 5% may be risky (which you acknowledge) in terms of you running out of money if the capital growth of your portfolio is not sufficient to make up for it or sequencing risks. Unless that is your intention as we can't take it with us after all!

Interestingly you linked to the Hartford Funds research which not only shows the benefits of Compounding dividends but also the benefits of targetting Companies growing thier dividends for higher returns & lower risk. If you could afford to live with a lower income a safer way to go may be to target Companies & investment trusts which can grow their dividends consistently over time (ideally ahead of inflation). Then just take the natural yield (3 to 4% or more perhaps) as it comes which might then grow in line with or ahead of inflation if the Companies & funds you choose are successful in that regard.

The capital side should then take care of itself and you should then be able to live with the volatility in the capital without worrying about it. Obviously the main risk to this is a 2020 Covid type situation where there are widespread dividend cuts & suspensions. Hopefully that will prove to be a one off situation, never to be repaeated, but in any event dividends did bounce back pretty quickly. So as long as you have some emergency funds too then it should be manageble.

Any way that's how I do it personally, but obviously not possible or desirable for everyone depending on their circumstances / tax postion etc.

Regards,

Jamie

Compound Income

Twitter:jamie@compoundincome

Rusty2

Surprising as the top stocks pay very little in dividends, Microsoft (NSQ:MSFT) pay 1%, Apple (NSQ:AAPL) pay 0.62%, the other top 4 pay nothing, not much compounding there. What is the growth is from reinvested dividends in the last 10 years? I think it has changed with the top companies paying low or no dividends recently. The S&P 500 yield in the 70s and 80s was around 4-5%, now it is only around 1.7%. The index is up 4x in the last 10 years.

Of course, the approach taken by “Jack” in this article is pretty meaningless without knowing his age. If he retired in 1995 then even if he retired early in his 40’s that means he is maybe in his 70’s now. If so, then I can understand why dialling down risk is important, but buying equities that yield above the market average is not the way to do it IMHO.

He may also want to look at the fees charged by his boutique broker! The cost of charges and fees is important in maximising returns over 30 years. High fees can really hit long term returns. Personally, that’s one of the main reasons I started investing for myself 25 years ago. That and the fact I knew I couldn’t do any worse than the professionals…

Benson212

Interesting article and I too have been thinking about what I would do when I reach retirement age and switch my portfolio to a more passive income strategy. I'm 26 years away from when I can access my SIPP, but plan to compound my savings in small cap growth during this time (fingers crossed!).

My initial thought was to put are large portion of my equity portfolio into a dividend ETF. That's when I researched about £IUKD - a 50 stock ETF, selecting the highest dividend yielding stocks in the FTSE 350 - and yields around 6% (at current prices), but has historically achieved a yield of 5%... sounds perfect!

However...

The ETF's inception date was in December 2005 but has only produced 3.61% annualised return during this time. This is with dividends reinvested! (chart below).

If you were to take your dividends as income, with no re-investment, the annualised rate of return is -2.44% annualised! (chart below). This is fine if the only thing you care about is the income, but I think capital growth is still important to keep with inflation during retirement.

So in my personal opinion, being too passive with your income portfolio or 'buying for yield' will lead to underperformance. As a result, I've done some more digging into how I can achieve a high yield portfolio but with 'momentum'. Taking a look at the VM rank's performance over the last 10 years and producing an annualised rate of return of 16% as of writing, I selected the top 20 stocks and found the average dividend yield to be around 4.76% - not bad.

I then decided to optimise this further for yield and created a screen which is:

Mkt Cap: >= £50m

Rolling 1y Yield >= 1 x market median

VM Rank >= 95

Dividend Cover Rolling 1y >=1

Sort by descending VM Rank

Rebalance annually (to capture the full dividend yield) in a NAPS style or sell when the VM rank falls below 85 (to ensure you keep momentum).

By selecting the first 20 stocks, I have increased the forecast yield to 7.99% and I hope to capture the upside momentum which a VM portfolio can bring.

It would be great if anyone has done this before, and tell us what the performance of this is like. But my two cents on this, is that you will always need to be "active" at least once a year to ensure your performance doesn't drift downwards over time.

peterthegreat

Well done Jack and best of luck with your income shares. In contrast to your approach, my investing style has remained the same regardless of my age or whether I am retired. I always invest in what I hope will provide the best total return over the medium to long term.

Makaira88

“What I am targeting is £100,000 out of my ISA every year. That’s a 5% return on £1m.” Wrong: that would be a 10% per annum return on £1m.

26th Mar '23

I assume you are referring to the Hartford Funds Research. Worth noting that in the small print is said it was in comparison to an equally weighted S&P 500. The same outperformance it not I believe seen against the regular S&P 500 weighted by market cap as you allude to as investors / indexers increasingly chased / gravitated towards the big tech stocks etc.

Not done that specifically, but if you are doing it for the income might be worth using a higher dividend cover of say at least 1.5x to rule out the highest yielders with the greatest risk of cutting their dividends. You could also exclude the top quintile / quartile by yield as the 2nd quintile / quartile by yield have tended to do better than the highest yielders. This would obviously mean a lower starting yield, but might afford more growth and less risk perhaps, hope this helps.

Hi Jamie

Mine was a quick reply (rather than an in-depth heavily researched treatise) to what I found a (very) confusing article, with muddled logic. But reading between the lines he seems to think that having shifted to income stocks, to yield the magic 5%, these stocks will still grow at a sufficient clip to take his portfolio from £1.1m to £2m. I just don't think that is realistic.

I suppose what I am trying to say is I didn't find the article very helpful. Goldfinger said "You would like to hear another of my aphorisms [Mr Bond]?’ ‘Yes.’ ‘Well, Mr Bond.’ Goldfinger gave the rich man’s thin smile. ‘The safest way to double your money is fold it twice and put it in your pocket.’"

While that might be a little conservative, the most likely solution to being able to draw £100,000 out of your ISA at age 60 is save £400 a month for 40 years, and hope with a following wind you mind mange 10% growth but expect 8% and up the savings rate as you get older. Then draw 4% from your savings.

One of the many things I have learnt since I started investing, is that most people, including myself, are far too bullish on expected returns, rates of inflation and drawdowns we are likely to suffer along the way.

If I had set my investing goals much lower at the outset, I believe my outcomes would have been much better for it.

Excellent process, I will investigate further.

Thank you.

Storminormski

28th Mar '23

He said: At the moment I am generating a 5% return on £1m.

Peter John

22nd Apr '23

Thanks for sharing but to me you may be captive to your environment and experience set. I too have more than 20years investing experience and believe the market is a great way to keep liquid assets working for you. I believe returns are a combination of dividends and capital movements which can be up and down. As John Maynard Keynes said in the long run we are all dead. But while you are here, you have to protect and grow your capital else it will degrade to nothing. Suggest a target of 25% return, less stocks to manage, the fallacy of diversification protecting you is just that a fallacy. You are not the Market, or a market maker. Time to manage the portfolio is a normal non lazy process. I still have time to play golf 4 times per week at 71 and make time for family. To achieve 5% return and 50,000 in cash income is great but not it your capital has gone down by 50,000.

Insights from ISA Millionaires: How to generate £100k of annual income from your ISA

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Getting Started

Hunting for growth

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About the Author

Megan Boxall

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