A Stocks and Shares ISA can be a useful way to earn passive income. I aim to do that by buying into companies I assess as having good dividend potential.
Given the current state of the UK stock market, I could comfortably aim for a 6% dividend yield while sticking to blue-chip FTSE 100 choices for my Stocks and Shares ISA.
Doing that ought to earn me £1,200 in dividends annually. But if I was willing to take a long-term approach to investing – as I am – I could aim for that much in dividends every month!
Quality on sale is the name of the game
Not only are some shares yielding 6%, a number of FTSE 100 companies yield 7%, 8%, 9% or even higher. Examples from my portfolio include 10.1%-yielding Vodafone and M&G with its 9.7% yield.
Why do I own these shares but not some other FTSE 100 high yielders? After all, dividends are never guaranteed and firms like M&G and Vodafone could both decide to cut theirs.
I own those dividend shares – and others – because I have weighed the risks against the potential rewards I see from their businesses. If I like what I see, I consider buying the shares to hold.
In other words, I never buy a share just for its yield.
Instead, I aim to find great businesses selling at a lower share price than I think they are worth. Only then do I consider the yield.
Building a high-yield portfolio
Fortunately for me, I think the market currently offers me a number of opportunities to invest in great companies at attractive prices with a high yield to boot.
Doing that, buying into firms like British American Tobacco and Legal & General, I believe I could comfortably target an average 8.5% yield while sticking to blue-chip names.
If I did that, I could earn £1,700 in passive income annually.
Compounding to build passive income streams
That would be welcome. But it is still a far cry from my target of £1,200 per month. That equates to £14,400 per year.
To try and achieve that, I would reinvest my dividends initially rather than taking them as cash. The way they then build up is known as compounding.
If I compounded my £20,000 Stocks and Shares ISA at 8.5% annually, after 27 years I would be earning over £1,200 in passive income every month! Of course, I have to accept that might achieve a lower return.
Long-term approach can be very lucrative
I said above that my strategy involved taking a long-term approach to my Stocks and Shares ISA.
My example presumes constant share prices and dividends. In practice, they could move up or down over time.
But I think it demonstrates how buying the right shares and thinking for the long term could potentially yield me large passive income streams in the future.
The post £20k for a Stocks & Shares ISA? Here’s how I’d aim to turn it into passive income of £1,200 a month! appeared first on The Motley Fool UK.
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C Ruane has positions in British American Tobacco P.l.c., Legal & General Group Plc, M&g Plc, and Vodafone Group Public. The Motley Fool UK has recommended British American Tobacco P.l.c., 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.
