I’d target £10 a day in dividends from a £10K Stocks and Shares ISA like this!

By investing a Stocks and Shares ISA in the right way over the long term, this writer thinks he could turn it into a passive income machine!

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As a long-term investment vehicle, a Stocks and Shares ISA can be a good match for my long-term approach to investing.

That might mean targeting long-term price gain.

If I had invested in Rolls-Royce a year ago, for example, my stake would since have tripled in value. If I had invested in NVIDIA stock five years ago, each £1,000 of shares I bought then would now be worth almost £33,000!

But a lot of the companies in my Stocks and Shares ISA attract me less for their price growth prospects than for the passive income streams I hope they can pay me in the form of dividends.

Finding income shares to buy

Imagine I decided I wanted to target £10 each day on average in such passive income. That would be £3,650 per year in dividends.

Starting with a £10K Stocks and Shares ISA, that might seem impossible. After all, few shares ever have a yield of 37%. Even if they did, such an unusually high yield would often be a red flag to me as an investor.

So, to start, I would forget about yield. Instead, I would hunt for great companies with strong cash generation prospects and attractive share prices.

One dividend share I’d buy

As an example, consider a company I would be happy to own in my Stocks and Shares ISA if I had spare cash to invest: Phoenix (LSE: PHNX).

The pensions and retirement specialist has a proven business model that is highly cash generative. Last year, for example, it was targeting cash generation of around £1.8bn and blew past that by generating over £2bn.

I think its customer base in the millions, proven expertise in managing pensions, and the right to use strong brands like Standard Life could help Phoenix keep doing well.

A financial downturn risks hurting profits, especially if it means the company’s valuations for things like its mortgage book turn out to be optimistic.

But remember I am investing my Stocks and Shares ISA for the long term. Phoenix has a progressive dividend policy and already yields a mouth-watering 10.6%.

Using compounding to my advantage

That means it is one of the highest-yielding shares in the FTSE 100. Imagine I target a more modest average yield of 7%, which is nonetheless still well above the FTSE 100 average.

At 7%,a £10K Stocks and Shares ISA ought to earn me £700 annually in dividends.

But if I simply reinvest them rather than take them as cash and my ISA compounds at 7% annually, after 25 years, I should be earning the equivalent of slightly over £10 per day in passive income. Target achieved.

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 no position in any of the shares mentioned. The Motley Fool UK has recommended Nvidia and Rolls-Royce 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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