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With the deadline for new contributions to the Shares and ISA Shares one, I’ve been thinking about how I might take advantage of it.
One approach would be to invest my ISA with the goal of generating substantial passive income in the form of dividends. As an example, if you wanted to target £1,600 in annual passive income from a Stocks and Shares ISA with £20,000 in cash, this is how you would do it.
target performance
Is such a goal realistic?
I think so. It would require me to earn an average dividend yield of 8%. That’s high, but not unrealistic in today’s market.
Quite a few blue chip stocks in the FTSE 100 are currently returning 8% or better, including barratt, legal and general, M&G, Phoenix, Taylor Wimpey, and vodafone. In addition to that, there are some investment funds with returns greater than 8%.
But just because a stock pays a certain dividend now doesn’t mean it will continue to do so. So when I invest my Stocks and Stocks ISA, I follow a couple of principles. I diversify into different stocks. With £20,000, you could split the money equally between five and 10 shares.
I also focus on buying shares in bright businesses at what I consider to be attractive valuations. That means I don’t just focus on performance. I look for quality at the right price and only then do I consider my dividend targets.
Find stocks to buy
What makes a great business?
I first look for a company that operates in an area that I hope will continue to experience high customer demand. Then I consider whether it has any competitive advantages that might set it apart from its rivals in that field, such as proprietary technology or a strong brand name. That helps give you firm pricing power and that can help you make a profit.
I look for an attractive share price, even if my investment objective is dividend income and not a share price increase. After all, despite being a long-term investor, you may want to sell the stock at some point in the future. If I’ve generated a lot of dividend income from them, but end up selling the shares at a huge loss, the lifetime value of my Stocks and Shares ISAs may end up falling overall.
At this point I also consider the dividend yield. If I want to target £1,600 in annual income and the yield on a stock isn’t high enough to help me do that, I may decide not to buy it for my income portfolio at this time. If the stock price falls in the future, the potential return could increase to a level that seems attractive to me.
Using my ISA allocation
Putting £20,000 into ISA shares and shares would exhaust my annual allowance. Once the money is in the ISA, I don’t have to invest it immediately or even soon.
Instead, I can and would take the time to pick the kind of high-quality income stocks that I hope can pay big dividends for years or decades to come.
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