With little more than a fortnight left until the deadline for contributing to an ISA, I am thinking about how best to use my £20k annual Stocks and Shares ISA allowance.
One option would be to try and set up sizeable passive income streams. With £20k to invest, here is how I would target dividend income of £1,590 each year, from year one.
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.
Setting up the ISA
First things first. My immediate move would be to set up my Stocks and Shares ISA.
I would then put my £20k allowance into the ISA before the contribution deadline early next month.
Finding income shares to buy
I do not need to invest that money straight away. However, in the current market, there are enough attractively-priced income shares I think I would invest in.
When I say attractively-priced, I do not necessarily mean that the share price is low.
Rather, I mean that I find the price to be attractive when considering the long-term commercial potential of the underlying business.
British American Tobacco (LSE: BATS) shares, for example, cost over £23 each. But they have a dividend yield of 9.9%, meaning that I ought to earn £99 for every £1,000 I invest in them.
Building a portfolio
Would I do that? In fact I already have! I hold British American Tobacco shares. The quarterly dividend is a useful source of passive income for me and many other investors.
A lot of people still smoke cigarettes, while others are taking up non-cigarette tobacco consumption using vapes and the like. With its premium brand portfolio, huge distribution network and long market experience, British American is a cash machine.
It is also a Dividend Aristocrat, having increased its dividend per share annually since the last century.
Diversification and risk management
But while non-cigarette products remain in a growth phase, ciggies themselves are in long-term decline in many markets.
Last year, British American wrote down the long-term value of some of its brand assets to zero.
Of course, declining cigarette consumption is a risk to both revenues and profits at the firm – as well as the dividend. After all, dividends are never guaranteed to last.
So I never put all my eggs in one basket. With my £20k ISA allowance, I could diversify my portfolio evenly across five to 10 shares from different business sectors.
I would look for quality businesses selling at attractive share prices. Only when I find such choices do I consider dividend yield.
To hit my annual passive income target of £1,590, I would need an average yield of just under 8%.
I believe I could hit that now, investing not only in British American but also other FTSE 100 shares such as M&G (8.3% yield), Legal & General (8.1% yield) and Phoenix (10.7% yield).
Indeed, with some blue-chip shares yielding even higher than my target, I could still hit it by adding in some other high-quality shares with a 7% or 6% yield into my ISA. In today’s market, I see lots of candidates!
The post How I’d invest my ISA allowance right now to target annual passive income of £1,590 appeared first on The Motley Fool UK.
Should you buy British American Tobacco shares today?
Before you decide, please take a moment to review this first.
Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.
It’s called ‘5 Stocks for Trying to Build Wealth After 50’.
And it’s yours, free.
Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.
And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.
That’s why now could be an ideal time to secure this valuable investment research.
Mark’s ‘Foolish’ analysts have scoured the markets low and high.
This special report reveals 5 of his favourite long-term ‘Buys’.
Please, don’t make any big decisions before seeing them.
Claim your free copy now
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
I’d buy 1,784 shares of this FTSE 100 stock to target £350 of monthly passive income
8%+ yields! Should I buy these FTSE 100 income shares this month?
1 dividend superstar I’d buy over Lloyds shares right now
2 UK shares that could help set up a SIPP for decades!
Turn a £20K ISA into £1,980 in annual passive income? Here’s how!
C Ruane has positions in British American Tobacco P.l.c. The Motley Fool UK has recommended British American Tobacco P.l.c. and M&g Plc. 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.
