One straightforward, practical way to try and earn some extra income is by investing in a Stocks and Shares ISA.
If I had £20,000 to invest and wanted to target passive income of £1,800 a year, starting from next year, here is how I would go about it.
Great time to invest
That level of income means I need to earn an average yield of 9% on my ISA. Often, I would see that as too ambitious a target while investing in the sort of high-quality companies I want for my ISA.
But from an income perspective, I think right now can be a great time to invest. Even among the blue-chip firms of the FTSE 100, quite a few shares offer yields around 9% in the current market.
That said, my focus is not primarily on yield. I buy what I think are great shares with promising long-term business prospects. The fact they also offer me a high yield is a bonus.
Putting together my portfolio
I would spread my Stocks and Shares ISA evenly across five different investments.
Vodafone has a large customer base and strong brand. It should benefit from ongoing high demand for data services, although paying down the company’s debt pile is a threat to profitability. The shares yield 10%.
Asset manager M&G yields even more, at 10.3%. That could signal investors can see notable risks, such as clients withdrawing funds amid economic uncertainty. But I like M&G’s strong reputation and global reach.
I also like the global reach of British American Tobacco. Its premium brands give it pricing power. That helps it generate huge free cash flows, although falling cigarette usage could hurt profitability. It yields 9%.
Investment trusts
Next on my list would be Income & Growth Venture Capital Trust. This week, it announced a second dividend for the year of 7p a share, meaning it is on course to yield 14.7%.
But looking forward to next year and beyond, I would try to aim for my target using the lower dividend level of last year. That still gives a prospective yield of 9.3% and seems more realistic to me than expecting nearly 15% in the long term. As the trust pays out money from its investments in small- and medium-sized companies, the dividend does tend to move around a fair bit.
Finally, I would buy into investment trust European Assets Trust. That would give me exposure to a wide range of European companies. If the economy in countries like Germany improves, the trust could benefit – though the reverse is also true. The yield is 7.1%.
Hitting my target
With an average yield of around 9.1%, buying these five choices for a £20k Stocks and Shares ISA ought to generate a bit more than £1,800 of passive income next year.
If I had £20k to invest today, I would be happy to do that, then sit back and hopefully watch the dividends roll in!
