Some Cash ISAs now offer around 4%. That’s for a fixed year, though. For long-term income, I’d go for dividends from a Stocks and Shares ISA instead, every time.
And with only days left before the ISA year runs out, if you want to buy more you need to do it pretty sharp.
So, what to buy? I think it would be a mistake to simply go for the biggest dividends on offer.
The long term
Most who buy shares in an ISA today are investing now to build a passive income stream to take at some time in the future.
So, the aim must be to build up as big a pot as we can by the time we need the cash. For that, I look for good total returns.
A big dividend is no good if it doesn’t keep going. And share price falls can wipe out any dividend cash too.
Vodafone looks good on the face of it, but it’s not for me. The forecast yield stands at more than 8%, so why wouldn’t I want that?
Well, in 2014, the share price was up around 440p. And now it’s down at 89p. It looks like it’s destroying value to me. And that won’t get me the cash I want when I retire.
Variable
Glencore also raises a caution. There’s a nice 8% yield on the cards here. But Glencore has cut its dividend five times in the past decade.
That doesn’t rule it out. But it makes it clear that one year’s dividend isn’t enough. We need to look for long-term yields.
Aviva shows a different risk. The 2023 yield stands at 7.5%. But it looks like it will only be weakly covered by earnings.
That might not be so bad if earnings are set to rise. But it’s another thing to look out for. To keep dividends going in the years ahead, a company needs to make the cash to pay them.
Start an ISA?
What would I buy to start a new Stocks and Shares ISA aimed at building dividend income?
First, I want dividends that grow over the long term, not ones that are up and down year after year. I want enough earnings to cover them too. And I want to see share prices hold up.
I’d start a new ISA with an investment trust or two. I hold City of London Investment Trust, with a 5% yield. And it’s raised its dividend for 56 years in a row.
I also buy stocks in sectors that I think have great long-term futures, even if they’re suffering right now. So for long-term income, I rate banks and housebuilders as among today’s best buys. I think they’re on great bargain valuations.
Risks
There are individual risks with all of these stocks, which I can’t go into here. But the way I deal with that is to diversify. For me, that has to be a key part of an ISA.
And, these are not individual recommendations. They’re just some ideas of my way to create income from an ISA.
