One of the benefits of having a Stocks and Shares ISA can be the dividend income investors receive. So here is how I would go about managing mine if my aim is to generate dividend income.
Focus on the long-term outlook
Receiving dividends from a share I own this year or next year would be welcome. But what I really want is to invest in a company that pays dividends annually for decades. Companies like Shell, Diageo and British American Tobacco have done that, although that does not mean they will necessarily do so in future.
This matters for a couple of reasons. If a company cuts or cancels its dividend in future, the passive income prospects I hoped for by adding it to my Stocks and Shares ISA may not come to pass. But on top of that, a dividend cut can often signal a business is facing some difficulties. So after a dividend cut, the share price may fall too.
How can I try to avoid this situation? There is no guaranteed method, but a key part of my approach is to focus on quality companies. By that I mean businesses with some competitive advantage I think could help them make profits year after year.
For example, it could be a firm with a distribution network no-one can easily match, like National Grid. Or the firm may have a unique product, such as the Irn-Bru brand owned by AG Barr. Such a competitive advantage can help a company make profits even when its market gets tough, enabling it to continue paying dividends in future.
Look at value
What makes a great company to invest in? It is not enough simply to have a great business – the share must also be attractively priced.
Overpaying for something, no matter how good it is, can mean it makes a disappointing investment. In terms of dividend income, it can mean that the yield is fairly low because of the high price I pay for the share. For example, I think Spirax-Sarco is a great business. It has raised its dividend annually for over half a century. But the current share price does not look like good value for my portfolio, with it offering a dividend of just 1.1%.
So with dividend income as my objective, I would always consider the value a share offers me. That is about how promising the business is — but also how much I pay for its shares.
Adding variety to my Stocks and Shares ISA
Even trying hard to find the right shares to generate dividend income from my Stocks and Shares ISA, I may make mistakes. A recession could hurt a company’s profits, or new management may decide to cancel the dividend and spend the money in another way.
That is why I always make sure I own a variety of shares operating in different business areas in my Stocks and Shares ISA. After all, not all shares I choose will necessarily end up paying me big dividends. Hopefully though, if I hunt for them carefully, I can find some that will!
