Put money into a Stocks and Shares ISA, buy a range of high-quality dividend shares, monitor the portfolio from time to time.
Can earning sizeable passive income streams really be as simple as that? Yes it can!
Here is how, using the example of someone who has a spare £20,000 to invest, they could target an annual passive income of £18,000.
Setting the right approach
I ought to explain immediately that this is no overnight scheme. Rather, it is an example of how a long-term approach to investing can hopefully pay rewards in future.
If the £20k is compounded at 8% annually, after 32 years the Stocks and Shares ISA should be worth over £234k. An 8% dividend yield on that would amount to over £18k a year in passive income – without touching the capital.
With more than £20k, the timeline could be reduced — or the goal could be targeted with less than £20k, but taking more years to reach it. Another variable is the compound annual growth rate and later, dividend yield achieved. The higher that is, the quicker the goal could be hit — but it is important to stay realistic. Too much risk could mean what seems like a quicker approach ends up being a slower one after all.
The initial compound annual gain includes share price gains as well as dividends, but of course share prices can go down as well as up. Dividends are never guaranteed.
That helps explain why I think the savvy investor will take time to construct a carefully selected, diversified portfolio of high-quality shares.
Another element that could eat into the compound annual growth is fees, charges, commissions, taxes and the like. So choosing the most suitable Stocks and Shares ISA is also wise in my view.
Making a start
I think an 8% target is realistic in today’s market. The current FTSE 100 average dividend yield is 3.3%. Some individual shares offer much higher yields – and the compound annual growth rate takes share price movement into account too.
One share I think income investors ought to consider is FTSE 100 financial services giant Legal & General (LSE: LGEN).
It may seem like a dull company that has been around for a long time – that is part of its appeal to me. It has focused its strategy in recent years by specialising in retirement-linked investments. That appeals to me as it is a market with large, resilient, long-term demand.
However, Legal & General is not the only firm to see such attractions. But I see its strong brand, long market experience and large customer base as advantages that can help it compete against rivals.
The company aims to grow its dividend per share at 2% annually and this week raised its interim dividend by 2%. With the dividend yield already standing at 8.4%, it could be lucrative for investors.
One concern I have is that the agreed sale of its US protection business, while expected to bring in several billions of dollars in cash in the short term, may hurt long-term profitability.
Still, I see a lot to like about Legal & General and its future business prospects. As part of a diversified Stocks and Shares ISA I think it could potentially be a strong passive income generator in years to come.
