Putting money into an ISA and then drawing an income from it every year is one way to turn a smart move today into a rewarding one for the future.
If I had a spare £12,000 to invest in my Stocks and Shares ISA right now, I think I could target an annual dividend income of £1,000.
Here is how I would go about it.
Investment principles
When investing in a Stocks and Shares ISA, I apply the same principles I do more generally.
I would diversify across a number of shares to reduce my risks if any one of them turns out to be less rewarding than I expect. £12,000 would comfortably let me spread my ISA across five or six different companies, in equal amounts.
My focus would be on buying what I think are excellent businesses at attractive prices. An £1,000 annual income from £12,000 implies an average yield of 8.3%. That is higher than most shares offer. But I would actively seek to avoid falling into value traps by chasing yield. Instead, I would stick to buying shares in high quality companies.
Building a portfolio
Fortunately, in the current market I can see candidates for my Stocks and Shares ISA that match that description – and deliver my target level of yield.
British American Tobacco is an example and indeed its current yield is exactly 8.3%.
I like the company’s massive cash flows and premium brand portfolio. Declining cigarette usage is a risk to sales and profits but, for now, the market remains vast and the firm is quickly growing its non-cigarette business.
Like British American, I already own financial services firm M&G in my portfolio. It has a large customer base, strong brand and vast potential market. On top of that, it yields 9.7%.
Can the dividend last? Dividends are never guaranteed and M&G does face risks, such as turbulent markets hurting investment returns. But it raised its annual dividend by 6% this year, which I take as a sign of management confidence.
Hitting the goal
With a share like M&G yielding more than my target, I could still meet my 8.3% average yield goal by investing in some shares that yield a bit less.
As well as individual companies, I would also consider some investment funds. The Income and Growth venture capital trust yields 10.9%, for example. Henderson Far East Income offers 9.6%.
Investing in funds rather than just individual companies could help me further improve the diversification of my Stocks and Shares ISA. But I would consider the fund investment strategy carefully and weigh up its long-term prospects. Whether through a fund or directly, I am aiming to invest in high-quality, attractively-priced businesses.
Four-figure income
In the current market, I think I can realistically aim to generate £1,000 annually from my Stocks and Shares ISA as passive income, by investing £12,000 today.
If I buy good shares hopefully, over time, their dividends may grow – and earn me even more each year.
The post How I’d invest a £12,000 Stocks and Shares ISA to target £1,000 every year appeared first on The Motley Fool UK.
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C Ruane has positions in British American Tobacco P.l.c. and M&g Plc. The Motley Fool UK has recommended British American Tobacco P.l.c. 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.