April comes, April goes. ISA deadlines come, ISA deadlines go. Each April, the end of the tax period marks the annual cut-off point for people to contribute to their ISA under that tax year’s allowance. Some people use that very smartly to generate a sizeable second income.
Lots do not – and last tax year’s ISA contribution deadline this month passed for ever.
But the good news is that, as one door closes, another opens.
This month saw the start of a new tax year – and with it a whole new ISA contribution allowance for most UK investors.
Here is how not using that could mean missing out on a powerful opportunity to build a second income from dividend shares.
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.
Money for nothing
Many shares pay dividends – basically a way for the company to use spare cash to reward shareholders.
Not all do, though, which is why savvy investors choose carefully and spread their portfolios over a diversified range of companies.
Say someone put £20k into such a diversified portfolio today and was able to compound it at 6% annually for 25 years, before then earning a 6% dividend yield on it. Doing that would generate an annual second income at that point of £5,150.
Now, someone could do that without using an ISA – for example, simply using a share-dealing account. Indeed, that approach would not be constrained by the contribution allowances imposed on ISAs.
Still, I think not using a Stocks and Shares ISA could be throwing away an opportunity for a couple of reasons.
First, the ability of dividends to compound tax-free inside the ISA wrapper should mean it is easier to hit a specific annual compounding target, like the 6% I mentioned, than if some dividends each year had to fund tax payment.
Secondly, the discipline of a fixed annual deadline can help the procrastinators move from dreaming mode to action mode. Without that, their goals of a second income may never amount to anything more than dreams.
Being realistic about goals can still be lucrative
Is a 6% compound annual gain or yield realistic?
The compound annual gain includes share price rises, though any price falls would eat into it.
One share I think investors ought to consider right now both for its price and dividend prospects is lab instrument maker Judges Scientific (LSE: JDG).
At first glance this may seem like an odd choice. The dividend yield is 2.5%, which is fine but not special by market standards, while the price of 57 times earnings looks expensive at first. After all, the company continues to face risks like a funding freeze hurting orders from US research institutions.
But last year’s almost basic earnings per share almost halved.
I hope they can recover and the company can return to historic growth norms thanks to its specialist product portfolio and ongoing expansion strategy. Then, today’s price — 22% lower than a year ago — could turn out to be a long-term bargain.
Even last year’s sharply reduced basic earnings per share still (just) covered the dividend. A 10% dividend per share increase continued Judges’ history of double-digit percentage increases.
Its well-honed business model could help keep such rises coming.
