A Stocks and Shares ISA is a suitable platform for long-term investing. That can also make it a convenient way to try and earn passive income by investing in dividend shares.
That can be enormously lucrative for the patient lifelong investor.
To show how it can be done, I will walk through an example of someone who puts a £20,000 ISA to work over 50 years. The first half of that period is about growing the value of the ISA. The second 25 years involves drawing a passive income each year, without touching the capital.
For one £20,000 investment today, that passive income could add up to over £228,000 between years 26 and 50 of the plan.
Using time to your advantage
Despite the large total income involved, the technique here is simple.
For 25 years, the investor compounds the Stocks and Shares ISA, targeting an average annual rate of 7.5%. That should grow its value to just under £122,000.
Investing that at a 7.5% yield, the annual passive income stream would be around £9,148. Over 25 years that adds up to £228,688.
So, for a one-off £20,000 investment today, over the next 50 years an investor could grow the value of their Stocks and Shares ISA multiple times over – and earn almost £229,000 in passive income, too.
Finding the right shares to buy
I do not think a 7.5% compound annual growth rate (comprising any share price movement and dividends) is overly difficult to achieve.
Even ignoring share price rises (or falls), a 7.5% dividend yield from a diversified blue-chip portfolio ought to be achievable in today’s market, I reckon.
Thinking with a decades-long perspective sharpens the mind when it comes to assessing whether a business is simply going through a good few years, or has the makings of sustained long-term success.
As an example, one share I think investors should consider for its long-term passive income prospects is Legal & General (LSE: LGEN).
The FTSE 100 financial services giant operates in the retirement-focussed investment space. I see that as a market that is large, resilient, and likely to stay that way.
Thanks to a strong brand, large customer base, and well-honed business model, the long-established company is a significant cash generator. That has helped it raise its dividend per share annually in recent years. It is currently targeting 2% annual growth in its payout per share.
Already, the dividend yield is 8.5%, so that planned annual increase means the prospective yield is even more lucrative.
Dividends are never guaranteed, though. One risk I see for Legal & General is uncertain stock markets and a weak economy hurting investor confidence. If they pull funds from Legal & General’s investment products, that could hurt the firm’s profits.
From a long-term perspective, however, I see the share as worth considering.
Making smart choices
An initial first step to unlocking such long-term passive income streams is having the right Stocks and Shares ISA.
Fees and charges can eat into returns, but fortunately there are lots of different choices available on the market.
