As an investor, I find the latest Stocks and Shares ISA figures both encouraging and sobering. HMRC data shows that 5,070 people held ISA portfolios worth at least £1m each at the start of the 2023/24 tax year.

That’s a relatively small group, but it proves that substantial tax-free wealth can be built through long-term investing.

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.

At a 4% retirement withdrawal rate, a £1m portfolio could provide roughly £40,000 a year. A more aggressively income-focused portfolio yielding 7% could produce £70,000 (albeit with increased risk).

That would certainly be a life-changing income for many households. But how can investors work towards it?

Learning from ISA super-investors

AJ Bell’s ISA ‘Super Investors’ offer useful clues. These ISA millionaires hold an average of 83% in stocks (including investment trusts), and hold around 23 assets per portfolio. Shell is among their most popular individual holdings.

That doesn’t mean every large ISA investor is targeting dividends. Some may prioritise growth, while others may draw income by selling investments.

Still, it shows the importance of owning productive assets rather than leaving a large portfolio entirely in cash.

For me, dividend stocks are key — but the yield’s only the starting point. I also look for:

• A long and dependable dividend record.
• A sustainable payout ratio.
• Strong earnings or cash-flow cover.
• Evidence of dividend growth.
• A balance sheet capable of surviving difficult economic conditions.
• A valuation that does’t already price in perfect results.

A very high yield can be a warning sign. The market may be signalling that profits are under pressure or that a dividend reduction is possible. The challenge is finding companies where the income is supported by a resilient business.

A lesser-known income gem

One company I find interesting is OSB Group (LSE: OSB), the specialist mortgage lender operating in the UK and India. Its latest full-year results show a 3.2% increase in the net loan book to £25.9bn, while new loans increased 19% to £4.7bn. It also reported a total dividend of 35.3p per share, up from 33.6p in 2024.

Critically, it’s been paying dividends since 2014, with a yield between 6%-7% for the past few years. Now that’s attractive for income! Plus, with a payout ratio of just 46%, it has lots of breathing space to keep payments up. That doesn’t eliminate the possibility of a future cut but significantly reduces it.

Don’t get me wrong, I know that banks and specialist lenders are highly sensitive to interest rates, arrears and credit losses. That’s the risk that must be weighed up, which is why I only hold a moderately-sized allocation in a diversified portfolio.

Still, on balance, I think it’s a strong income stock that’s worth considering for ISA investors.

Building the income engine

Building a £1m ISA isn’t easy. It usually requires years of regular contributions, reinvested dividends, sensible diversification and the patience to remain invested through market downturns.

Even a £500m portfolio could still generate £35,000 a year on a 7% average yield. That would make the life-changing difference between a financially difficult retirement and a comfortable one.

Of course, none of these are guaranteed targets. The takeaway is that tax-efficient investing can turn modest dividend payments into a substantial long-term income stream.

Risk appetite’s key, which is where stable and reliable dividend-paying stocks come in. So for low-risk investors, I may have something even better than OSB…

What income stock do we like better than OSB Group right now?

One of our Share Advisor analysts has just released a brand new stock report that we think is a must-read for any investor looking to try and generate potential income.

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Mark Hartley owns shares in OSB Group.