With little more than a fortnight left until the deadline for contributing to an ISA, I am thinking about how best to use my £20k annual Stocks and Shares ISA allowance.
One option would be to try and set up sizeable passive income streams. With £20k to invest, here is how I would target dividend income of £1,590 each year, from year one.
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Setting up the ISA
First things first. My immediate move would be to set up my Stocks and Shares ISA.
I would then put my £20k allowance into the ISA before the contribution deadline early next month.
Finding income shares to buy
I do not need to invest that money straight away. However, in the current market, there are enough attractively-priced income shares I think I would invest in.
When I say attractively-priced, I do not necessarily mean that the share price is low.
Rather, I mean that I find the price to be attractive when considering the long-term commercial potential of the underlying business.
British American Tobacco (LSE: BATS) shares, for example, cost over £23 each. But they have a dividend yield of 9.9%, meaning that I ought to earn £99 for every £1,000 I invest in them.
Building a portfolio
Would I do that? In fact I already have! I hold British American Tobacco shares. The quarterly dividend is a useful source of passive income for me and many other investors.
A lot of people still smoke cigarettes, while others are taking up non-cigarette tobacco consumption using vapes and the like. With its premium brand portfolio, huge distribution network and long market experience, British American is a cash machine.
It is also a Dividend Aristocrat, having increased its dividend per share annually since the last century.
Diversification and risk management
But while non-cigarette products remain in a growth phase, ciggies themselves are in long-term decline in many markets.
Last year, British American wrote down the long-term value of some of its brand assets to zero.
Of course, declining cigarette consumption is a risk to both revenues and profits at the firm – as well as the dividend. After all, dividends are never guaranteed to last.
So I never put all my eggs in one basket. With my £20k ISA allowance, I could diversify my portfolio evenly across five to 10 shares from different business sectors.
I would look for quality businesses selling at attractive share prices. Only when I find such choices do I consider dividend yield.
To hit my annual passive income target of £1,590, I would need an average yield of just under 8%.
I believe I could hit that now, investing not only in British American but also other FTSE 100 shares such as M&G (8.3% yield), Legal & General (8.1% yield) and Phoenix (10.7% yield).
Indeed, with some blue-chip shares yielding even higher than my target, I could still hit it by adding in some other high-quality shares with a 7% or 6% yield into my ISA. In today’s market, I see lots of candidates!
