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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.
