A Stocks and Shares ISA can be a handy way to tuck investments away for the long term, hoping for the sort of price gains once seen at Tesla or NVIDIA.
But an ISA can also be an income machine, thanks to the potential for dividends.
If I wanted to target a weekly passive income of £190 on average, thanks to dividends, here is how I would go about it.
Setting a clear investment goal
£190 a week is equivalent to £9,880 a year. Imagine I had a £20k Stocks and Shares ISA. To invest it today and start earning £9,880 annually from next year onwards, I would have to earn a dividend yield of close to 50%.
Realistically, that simply is not going to happen. Even earning a 10th of that amount would mean I was yielding more than the FTSE 100 average.
Would I give up the plan? No. I would simply plan to compound.
The power of cash earning cash
Compounding means reinvesting the dividends rather than drawing them out as cash. I could do that until I had enough in my ISA to generate my target annual passive income, then start receiving that income instead of continuing to compound.
As an example, if I invested a £20k Stocks and Shares ISA now in such a way it could yield 8% on average, then after 24 years, I should be earning my target £190 a week in passive income from dividends.
That may seem like a long wait. As a long-term investor, that suits me fine. But if I wanted to start receiving income much sooner, I could. I would simply need to change my target to a lower one.
Finding shares to buy
Is 8% realistic? After all, it is more than double the average FTSE 100 yield. I do believe it is, even while sticking to high-quality blue-chip companies. (I would diversify across a few different companies, to spread my risks).
As an example, consider Legal & General (LSE: LGEN). Its yield is currently actually higher than my 8% example, sitting at 8.6%.
The firm operates in the financial services sector. Demand for things like pension planning is likely to remain high over the long run, I reckon.
A strong brand and large existing customer base are competitive advantages that could help the company generate spare cash and pay dividends. Indeed, by the end of this year, the company expects to have paid out £5.6bn-£5.9bn of dividends in five years.
The last time we saw a cut, around 15 years ago, followed very rocky times in the financial markets. That can lead investors to pull out cash, hurting profits for businesses like Legal & General. I see that as a future risk too. No dividend is ever guaranteed.
Turning an ISA into an income machine
Still, if I had spare cash in my Stocks and Shares ISA now, I would be happy to buy Legal & General shares.
If I did not have an ISA, my first move would be to find one that seems right for me.
