I see a Stocks and Shares ISA as a long-term investment vehicle. Along the way, if it can earn me some passive income in the form of dividends, even better!
In fact, I think an ISA can be a lucrative dividend generator. With £20k, here is how I would target £5k a year.
Setting a timeframe and approach
If I wanted £20k to earn me £5k in dividends each year straight off the bat, I would need to earn an average dividend yield of 25%. No FTSE 100 share pays anything like that amount.
There is another approach though. I could invest in shares with a lower yield then reinvest the dividends to buy more shares. That is known as compounding.
If I compounded a £20k Stocks and Shares ISA at 7% annually, then after 19 years it ought to be worth over £72,000. At a 7% dividend yield, that would be big enough to let me hit my £5k annual dividend target.
What I’d be looking for
Is that possible? I think it is. In today’s market a number of blue-chip shares yield 7%, or higher. My focus would be on buying into quality companies with proven business models that I felt had strong future income prospects.
Rather than putting all my eggs in one basket though, I would diversify across a number of shares. I would not just look at shares that currently have an appealing yield. After all, no dividend is ever guaranteed to last.
Instead, I would look for firms I felt likely had a strong source of future income.
One share I’ve bought for income in 2024
As an example, consider a share I bought this year and continue to hold: Legal & General (LSE: LGEN).
It benefits from strong ongoing demand for retirement-linked financial products. Thanks to its strong brand and long expertise in the financial markets, the company has built a sizeable customer base. I see that as an advantage for the business and also like its financial performance.
That has helped Legal & General hone a business model that has been consistently profitable in recent years. It has set out plans to keep raising its dividend annually (albeit by a smaller amount than at present). As said, while dividends are never guaranteed, if Legal & General sticks to its plan, the prospective yield would be even higher than the 8.9% it offers today.
How likely is that to happen? One risk I see is a market downturn leading to clients withdrawing funds, squeezing profitability at the FTSE 100 firm. Overall though, Legal & General is exactly the sort of share I like to own from a passive income perspective. I plan to hold on to it for the long term.
The post £5k of dividends a year from a £20k Stocks and Shares ISA? Here’s how! appeared first on The Motley Fool UK.
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C Ruane has positions in Legal & General Group Plc. The Motley Fool UK has no position in any of the shares mentioned. 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.
