One way I use a Stocks and Shares ISA is to generate a passive income. That lets me benefit from the success of blue-chip companies without needing to do the hard work myself. Over the course of time, I think this approach could prove to be fairly lucrative.
If I had a spare £20k today to invest in a Stocks and Shares ISA with the objective of generating a second income of £3,815 a year, here is the plan of action I would adopt.
Choosing the right ISA
My first move would be to pick a Stocks and Shares ISA that suited my personal financial circumstances. There are lots of different options available, so I would want to pick the right one for me.
I could then put my £20k into it and get ready to start investing.
Setting a strategy
Next I would decide how I wanted to invest the money. If I was a novice investor, it Is at this point that I would learn the basics of how the stock market works.
Then I would decide my strategy. That does not need to be complicated, but I think having a sense of what I want to do could help guide my investment choices.
In all cases I would be looking for a great business selling at an attractive valuation. Only after establishing that would I then consider the dividend yield.
Finding shares to buy
Even the best business can run into unforeseen difficulties however, so I would diversify my ISA across a number of different shares. With £20k, I could comfortably spread my choices over five to 10 shares.
I would stick to business areas I felt I understood, so I could assess the prospects of the businesses in which I was thinking about investing.
The sort of income share I own in my portfolio is British American Tobacco (LSE: BATS). I like the multinational tobacco manufacturer’s portfolio of premium brands, its strong market position and large customer base. The company is a free cash flow machine and has raised its dividend annually for decades.
Hopefully, the juicy yield of 9.7% may not even fully reflect what I earn, if the dividend keeps growing.
But with cigarette sales declining and British American having a lot of debt, the dividend could go into reverse at some point and may even be cancelled if things get bad enough.
This illustrates why, as an investor, I need to consider seriously the risks of a share before I buy it. My hope for British American is that cigarette sales decline but still continue for decades, while the business grows its non-cigarette business.
Targeting income
Investing a £20k ISA at an average yield of 9.7% should earn me £1,940 in dividends annually. If I reinvest the dividends at first though, a 9.7%-yielding £20k ISA ought to let me hit my second income target of £3,815 annually after seven years.
If my average yield was lower, I could still aim to follow the same strategy but it would take me longer to hit my target.
The post I’d try to turn a £20k ISA into a £3,815 second income like this appeared first on The Motley Fool UK.
5 Shares for the Future of Energy
Investors who don’t own energy shares need to see this now.
Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.
While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.
Open this new report — 5 Shares for the Future of Energy — and discover:
Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
How to potentially get paid by the weather
Electric Vehicles’ secret backdoor opportunity
One dead simple stock for the new nuclear boom
Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!
Grab your FREE Energy recommendation now
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
Here’s how I’d invest £20K in a Stocks and Shares ISA to target a 7.3% yield in 2024
Here’s how this 10% dividend star could make me £500 a month in passive income
3 FTSE 100 Dividend Aristocrats investors should consider buying
£17,000 in savings? Here’s how I’d try to turn that into £1,552 a month of passive income!
How much passive income could I get from the UK stock market in 2024?
C Ruane has positions in British American Tobacco P.l.c. 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.
