Fancy earning a four figure passive income from your Stocks and Shares ISA next year?
Such an idea certainly grabs my attention. I also think it can be a realistic goal even for a Stocks and Shares ISA that has only one year’s contribution allowance (£20k) in it.
In fact, a four figure income could be possible on such an amount with a 5% dividend yield — 5% of £20k is already £1,000, after all.
But I think an investor could realistically target a higher yield, of 7%. That should produce £1,400 per year of passive income in the form of dividends.
Where to hunt
It is important when buying dividend shares not just to look at the current yield. After all, no dividend is assured. They can rise, fall or be cancelled altogether.
So the investor ought to look at a business and consider how likely it is to pay a certain level of dividend in future.
The FTSE 100 offers a number of shares that yield 7% or above, such as M&G (LSE: MNG), Phoenix Group and Legal & General.
But the FTSE 250 index also contains quite a few 7%+ yielders. On top of that, there are other shares in the market that are not big enough to make it into either index but yield over 7%. For example, Gresham House Income & Growth Venture Capital Trust currently yields 8.4%.
So while an investor needs to consider the quality of a business and sustainability of its dividend, they can make their search easier by not limiting themselves to the FTSE 100 alone.
Spreading money across multiple shares
As part of that process, some shares may look more attractive than others.
Many of us may have our favourites. But one mistake when investing is to get carried away with a single share rather than diversifying. Even the best-run company can get into difficulties that might not be foreseeable.
£20k is ample to spread a Stocks and Shares ISA over a few different shares. That strikes me as a smart thing to do when it comes to managing risk.
One share to consider
One dividend share I think investors should consider at the moment is the aforementioned M&G.
The asset manager aims to grow its dividend per share each year. That strikes me as attractive, especially given that the dividend yield is already a juicy 7.3%.
The company benefits from operating in a market that is huge and also likely to have long-term client demand. But that also throws up a challenge: there are lots of other asset managers keen to eat into M&G’s millions-strong customer base.
If the firm can deliver good results and keep its policyholders happy that might be fine. But I do see a risk of clients pulling more money out of its funds than they put in, hurting fee income.
That has been a challenge for M&G in recent years. The first half of this year, though, saw a net inflow of client funds. Continuing that trend could be good news for the business.
