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One way to make some money each year without working is to buy a stocks and shares ISA and fill it with high-quality dividend stocks.
If you had a £20,000 ISA and wanted to target £1,600 in annual dividends, this is how you would do it.
Using an ISA as an income machine
Dividends are never guaranteed, but many blue-chip companies have proven business models and a strong commitment to paying dividends.
So if I choose carefully the investments I make, I hope to be able to turn my stocks and Shares ISA into an income machine.
I would be looking for large companies that could generate substantial and ongoing free cash flow. To spread my risk, I would invest the £20,000 in five to 10 different stocks.
To achieve my goal I would need to obtain an average dividend yield of 8%.
I would not limit myself to looking for profitability, but I would try to find large companies that sell their shares at attractive prices. Only then would I consider performance.
The good news, however, is that at the moment there are quite a few FTSE 100 I think the companies have great earnings potential and are currently yielding around 8% or more.
What I'm looking for
As an example of the type of company I'm talking about, consider M&G (LSE: MNG).
The asset manager operates in a sector that I believe could benefit for a long time from high client demand. It can go up and down. For example, when the economy is bad, investors may withdraw funds, but in the long term I expect it to be substantial. As the sums involved are large, it can be very lucrative.
M&G is not the only asset manager, far from it. Therefore, competitive pressure is a risk to profitability.
But M&G has attributes that I believe can help it thrive, such as a well-recognized brand and an existing customer base spread across more than two dozen markets.
Shares yield 8.6%. If I had extra money I would be happy to add it to my stocks and Shares ISA.
FTSE 100 bargains
There are other FTSE 100 companies that look like potential bargains to me when comparing their trading potential with their current share prices.
But, as always, you need to consider the risks.
For example, I own Vodafone. I like its strong brand, large customer base and exposure to fast-growing mobile money in its African markets.
Not only that, but Vodafone shares are currently offering a mouth-watering return of 10.9%.
That certainly catches my attention. However, such high yields are often an indication of the City's concerns about the sustainability of a dividend. Vodafone has been shedding businesses in recent years. That could lead to lower earnings in the future and perhaps a dividend cut.
I still own the telecommunications business in my stocks and Shares ISA. But it is important to take risks seriously. So, as an investor, I'm looking for the sweet spot where you can buy shares of great companies at bargain prices.
