How I’d invest £10,000 in a Stocks and Shares ISA to target £50 monthly dividend income

With his eye on the monthly equivalent of £50 in passive income from dividends, our writer explains how he would go about investing £10,000 in his Stocks and Shares ISA.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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Owning dividend shares can be a good way of generating some passive income. In fact, that is one of the things I use my Stocks and Shares ISA for.

Below is an example of how I would aim to earn £50 each month in dividends by investing £10,000 in a Stocks and Shares ISA.

Dividend shares and passive income

Targeting £50 a month adds up to £600 each year. If I invested £10,000 in shares with an average dividend yield of 6% or higher I ought be able to achieve that.

Depending on how the dividends were timed, I might not get the money regularly each month, but rather a monthly average of £50 over the course of the year.

Focus on quality not dividend yield

Dividends rely on profits, so it could be a costly mistake if I invested in a high-yielding share without understanding a company’s business model or how likely it seems to make profits in future that could fund dividends.

So I would try to find businesses operating in markets with resilient customer demand. If they had some advantage that could help them make profits in future – like a large installed customer base or unique technology – I would consider them for my ISA.

Shares to buy now

Based on that approach, at the moment I would split my £10,000 evenly across the following five companies.

Insurer Legal & General has a distinctive logo, long history, and wide customer base. It has set out plans to keep raising dividends in coming years. Dividends are never guaranteed and one risk I see with Legal & General is an economic downturn leading to customers investing less, hurting revenues. But the company’s strengths attract me and it yields 7.4%.

For similar reasons, I would also buy the firm’s 10.8%-yielding rival Direct Line. Such a high yield can signal risk. I am concerned that renewal pricing rules introduced this year could hurt the company’s profit margins. But I think its strong brand, proven underwriting expertise, and ongoing customer demand for insurance should help the company.

I would buy tobacco manufacturer British American Tobacco for my Stocks and Shares ISA. The owner of brands including Lucky Strikes is a cash generation machine. That helps support a large dividend, with the shares currently yielding 6.3%. Falling cigarette volumes in many markets pose a risk to revenues. I think the company can use its sales network and brand portfolio to build its non-cigarette revenues in coming years.

I also like the long-term prospects at Tesco. People will always need to buy food. Increased competition from discounters may put pressure on margins but the market leader has a strong position and yields 4.2%.

My final choice would be vending booth operator Photo-Me. It has seen demand return strongly in most markets, although ongoing lockdowns in Asia remain a drag on profits. The company’s launderette business looks promising to me. The dividend yield is 3.8% but I think strong cash generation could enable a higher dividend in future, as happened before the pandemic.

Dividends from my Stocks and Shares ISA

With an average yield of 6.5%, spreading £10,000 in my Stocks and Shares ISA across those five choices should hopefully generate annual passive income of £650.

That comes out at around £54 each month in dividend income.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Christopher Ruane owns shares in British American Tobacco. The Motley Fool UK has recommended British American Tobacco and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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