Investing in a Stocks and Shares ISA can expose me to some large and very successful companies. That might help me ride the growth of industries from lithium to digital services. But I could also use my ISA to target dividend income, rather than going for growth as my priority.
Imagine that I wanted to make a four-figure annual passive income by putting £20,000 into an ISA now and then spending little time on it in future. Here is how I would go about it.
Dividends now, dividends later
With income my objective, the question I would ask myself in selecting shares to buy is which chosen companies would have a profitable business model both now and in the future? That matters because it takes money to pay dividends. And if a company cannot make a profit most of the time, it will not be in a position to do so.
We do not know what companies will be profitable in future and indeed that is one reason I would spread my £20,000 across five to 10 different shares rather than concentrating too much of my money in one or two.
But although the future is uncertain, I think some educated guesses can go a long way. For example, which industries will continue to see high demand in future? One I expect to stay around is insurance, which is why I would happily consider financial service providers like Direct Line or Legal & General for my Stocks and Shares ISA.
Then I would ask whether a company had a suitable business model to cash in on such demand. So I would look for something that could help set it apart from competitors, such as a famous brand, or unique piece of technology. I would also look at each company’s balance sheet. If a business is saddled with too much debt, that could eat up profits that might otherwise fund dividends.
Target yield
To get a four-figure annual yield, I would need to invest £20,000 in shares with an average yield of at least 5%. Right now I think that would be straightforward for me to do. There are lots of blue-chip shares yielding 5%. And as some offer more, I could also invest in 4% or 3% yielders while still hitting my target average.
The key thing I want to avoid though is making investment choices for my Stocks and Shares ISA purely on the basis of yield. I only aim to buy great companies I think can be profitable in future and trade at an attractive valuation. Even if a share has a juicy yield, buying it for the wrong reasons could turn out to be a costly mistake.
Monitoring my Stocks and Shares ISA
If I choose companies well using a long-term investing mindset, and hit my dividend income target, ought I then to keep trading the shares?
For me, the answer is no. I would occasionally check my portfolio and see whether anything had happened that might change the investment case for the shares I had chosen. In that case I may sell some shares and buy other ones. But otherwise, I would simply sit back and let the income roll in.
