How I’d invest my ISA allowance right now to target annual passive income of £1,590

Our writer explains how he’d use his annual £20k ISA allowance this year to target four-figure passive income streams for a long time to come.

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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.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

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!

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. The Motley Fool UK has recommended British American Tobacco P.l.c. and M&g Plc. 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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