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An ISA can be a useful way to not only try to build long-term wealth but also establish passive income streams.
Over time, that can become a substantial source of income.
That's because of two things: buying stocks that then pay big dividends, and boosting returns by reinvesting those dividends instead of withdrawing them in cash.
Income, income, income
This is not a plan that will turn my ISA into an income goldmine overnight. I'm a long-term investor and my approach to earning passive income reflects that.
You could happily wait a decade before switching from reinvesting dividends (known as compounding) to receiving them in cash. After 10 years compounding at 8% per year, you should be earning around £1,727 per year in passive income. That's approximately £33 per week.
Buy quality stocks for their dividends.
My 8% figure is based solely on dividends. In reality, it could be driven by share price growth, although the opposite could happen if the shares you buy fall in value.
I believe that in the current market a dividend yield of 8% can be achieved. Yes, it's more than double FTSE 100 average. But several FTSE 100 shares I happily own offer a higher yield than that at the moment. one is Legal and general (LSE: LGEN).
Find stocks to buy
I don't start by looking at performance. After all, no dividend is guaranteed to last. It can increase but it can also decrease, perhaps to zero.
So I look for great companies with attractive share prices and only then consider their returns.
Legal & General appeals to me for several reasons. Its business focuses on the field of financial services, especially those linked to retirement such as pensions. This is a huge market and I think it is likely to remain so. Legal & General has a large customer base and its well-known and established brand can help you gain and retain customers for your products.
He has extensive experience in the financial services market. That has helped him perfect a business model that in recent years has been consistently profitable.
That doesn't mean everything is simple.
First half after-tax profit attributable to shareholders was 41% lower than in the same period last year. The company faces a number of challenges. It noted in its interim results that the global economic outlook remains uncertain, with “The possibility that external shocks divert the course of economies and markets.”.
Looking to the future
The company cut its dividend during the last financial crisis, so that economic volatility is a risk I'm watching. Still, I happily own the stock and the current yield is 9.2%.
This is well above the 8% I previously mentioned as a target.
If I had an extra £10,000 in a stocks and Shares ISA, I would happily buy Legal & General (and stocks I found equally attractive), to try and make progress towards my second income goal.
