Here’s how I’d invest a £10K Stocks & Shares ISA to target £900 in dividends annually

By investing a Stocks and Shares ISA the right way, our writer thinks he could aim to turn a £10K sum into a dividend machine. Here’s how!

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A Stocks and Shares ISA can be a useful vehicle for targeting capital growth due to increasing share prices, dividends — or both.

If I wanted to target a £900 annual income from dividends using my Stocks and Shares ISA, here is how I would do it.

Aiming for the goal from day one

One approach would be to try and earn £900 per year, starting from year one.

Normally when looking at shares to buy for my ISA, I ignore the dividend yield at first and instead focus on shares in what I think are strong businesses with attractive share prices. I look for promising long-term commercial prospects and serious cash generation potential.

But even when doing that in the current market, I would still throw up a few names that yield at or close to the 9% target needed to earn £900 per year from my £10K straight off the bat.

Vodafone, for example, yields 11.0%, British American Tobacco 9.9%, and Legal & General 8.1%, to name but three examples of FTSE 100 shares I would happily own. In fact, I already own two of them.

Building up over time

I would want to keep my Stocks and Shares ISA diversified, as I always do. With £10K, I would be looking to spread the money over five to 10 different companies.

What if I decided to invest in lower-yielding companies than the ones above?

In that case, I could aim to hit my dividend income target over the longer run by reinvesting the dividends. That is known as compounding.

So while a £10K ISA invested with a 6% yield would earn me £600 per year, if I compounded my 6% annual return instead of receiving the dividends as cash, then after seven years I ought to be earning over £900 in dividends annually.

My approach

If I was happy with the quality and share price of high-yielding companies I mentioned above, I would be tempted to invest in them. But I may need to cast my net wider.

I would then consider shares yielding markedly less than 9% even though that was my ultimate target.

As an example, consider Unilever (LSE: ULVR). The consumer goods giant yields 3.8% at the moment. That is much less than some other FTSE 100 shares.

But I expect demand for products like soap powder and shampoo will remain strong for decades to come. Thanks to owning a stable of brands such as Domestos and Marmite, Unilever is able to build customer loyalty and charge premium prices.

The business model is proven, profitable, and I reckon it can endure. That is good for future dividend potential.

There are risks. Inflation could eat into profit margins, for example. But over time I expect Unilever to be a fairly reliable dividend payer unless something goes badly wrong.

Filling my Stocks and Shares ISA with companies I think have excellent income prospects and attractive share prices could hopefully help me clean up, even without using Unilever’s products!

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.

C Ruane has positions in British American Tobacco P.l.c. and Vodafone Group Public. The Motley Fool UK has recommended British American Tobacco P.l.c., Unilever Plc, and Vodafone Group Public. 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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