Using a Stocks and Shares ISA to earn passive income streams thanks to dividends is a relatively simple approach to try and earn some extra money without working for it.
It does involve risks, like any investment, but it can also produce potentially lucrative rewards.
For example, with a long-term approach and regular contributions, I think someone can realistically target an average monthly passive income of close to £3k.
Here’s how!
Setting realistic expectations is important
This is not some pie in the sky fantasy, so it is helpful to be clear about some of the expectations involved.
When I mentioned long-term contributions, I was envisaging a 20-year timeframe during which money is invested regularly and dividends reinvested to help grow the pot faster. That is before turning on the passive income taps (and stopping contributions to the Stocks and Shares ISA) after two decades.
I also mentioned regular contributions. In my example, I imagine someone starting with an empty ISA and then adding £1k each month for 20 years. At that point, the monthly passive income ought to be around £2,962.
Is all of that necessary? No! Someone could use a shorter timeframe, lower contributions – or both. But that would correspondingly reduce the passive income target.
Still, for many people, even passive income well below £3k a month would be welcome, if they can tailor the plan to their own financial circumstances.
Aiming for a 7% annual return
In this example, I presume the ISA can generate a compound annual gain of 7% for the 20 years of investment, then a 7% dividend yield.
At the moment the FTSE 100 yield is below half that level. Capital gain can boost compound annual gains on top of the dividend yield, but by the same measure any capital loss could hurt it.
So is a 7% target realistic? In today’s market, I think it can be, even while focusing the ISA on a diversified portfolio of blue-chip shares.
Fees, commissions and other charges can also eat into the returns, so it is worth shopping around when looking for the most appropriate Stocks and Shares ISA.
One share to consider…
One UK share I think income-focused investors ought to consider at the moment is FTSE 100 asset manager M&G (LSE: MNG).
The company has millions of clients spread across multiple markets. Its strong brand, long experience and deep expertise in financial markets can all help it do well. On top of that, it benefits from operating in a market that has strong, resilient demand.
Taken together, those factors help explain why M&G is able to be highly cash generative. That supports a 6.7% dividend yield. The firm also aims to keep growing its dividend per share annually, as it has over the past few years.
But dividends are never guaranteed and one risk I see is current investor nervousness about high markets and geopolitical volatility leading clients to pull more out of M&G funds than they put in. That could hurt earnings.
As a long-term investor though, I think the prospects for M&G look strong.
