£8,000 to invest in a Stocks and Shares ISA? Here’s how I’d target dividends of £100 per week!

A Stocks and Shares ISA can be a vehicle for investing over the long term. That is true whether one’s focus is growth, income, or both.

Taking a long-term approach, I think putting £8,000 into an ISA now could help me target weekly dividend income of £100 on average.

Here’s how.

Building income streams

When targeting dividend income, the two variables that dictate what I might achieve are how much I invest and my average dividend yield.

Take my £8,000 example. If I had that much in a Stocks and Shares ISA earning an average yield of 5%, I ought to generate £400 in yearly dividends. At 8%, that would rise to £640.

£640 of passive income each year could certainly come in handy. Still, it is a long way from my target of £5,200. So, how might I aim for that even while earning an 8% yield on average?

Dividends on the dividends

In a word — compounding.

Basically, compounding involves reinvesting dividends rather than taking them as cash.

Over time, that could effectively mean I earn dividends on my dividends. This is the sort of snowball effect that billionaire investor Warren Buffett talks about.

Recall that I said above I would take a long-term approach to my Stocks and Shares ISA. If I compounded £8,000 at 8% annually, it would take me 28 years to build my portfolio to the point where I was earning £100 each week on average in dividends.

If I was impatient for the passive income, I could compound less (or none) of my dividends. That might give me cash in the short term, although I would need to adopt a much more modest target.

How to find brilliant shares to buy

In my example, I have used 8%. Is that realistic?

I think it is. I own a number of blue-chip shares currently offering a yield of 8% or more, including well-known names like Vodafone and M&G.

But I did not buy them purely because of the yield. Simply buying a share for its yield can be what is known as a value trap. Dividends are never guaranteed and a high yield can be a warning sign that some investors fear the payout may be cut.

Buying a high-yield share and then having that happen can be doubly disappointing. Not only is the dividend reduced (perhaps to nothing), but such a cut can also often lead to the share price falling.

So when deciding what to buy for my Stocks and Shares ISA, I always look to find brilliant businesses selling at an attractive valuation. Only then do I look at their yield.

The post £8,000 to invest in a Stocks and Shares ISA? Here’s how I’d target dividends of £100 per week! appeared first on The Motley Fool UK.

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C Ruane has positions in M&g Plc and Vodafone Group Public. The Motley Fool UK has recommended M&g Plc and Vodafone Group Public. 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.