Saving up some money in an ISA then drawing dividends from it – potentially for decades – can be a straightforward way to try and build some passive income streams.
How much someone might earn doing that depends on how much is in the ISA and what the average dividend yield is.
To illustrate, let’s work backwards.
Aiming for a target
Say someone would like to target a monthly dividend income averaging £1,000. That’s £12k a year.
At a 10% dividend yield, that would require an ISA worth £120k.
However, 10% is unusually high for a dividend yield. At the moment, the FTSE 100 yield is 2.9%.
So let’s presume an average yield of 6%. I reckon that’s achievable in today’s market while sticking to blue-chip companies with proven cash generation potential.
At a 6% yield, the £12k annual figure would need an ISA worth £200k.
Taking a gradual approach
There’s a problem, though. The annual contribution allowance for an ISA is typically £20k.
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So, if someone had a spare £20k sitting around in an ISA, they could start immediately. But what if they didn’t?
Then, they could drip feed in £20k per year (actually the same approach could also work with smaller contributions, but it would take longer).
That sounds like it would take 10 years to reach the £200k level. But in fact, thanks to compounding (reinvesting dividends along the way), it would only take nine years.
At that point, having the ISA invested in shares yielding an average of 6% (or more) would provide an annual dividend income equivalent to over £1k each month.
That could go on for the rest of the investor’s life, if the shares are not sold and the dividends are not cut.
Finding shares to buy
In fact, the amount could well actually grow over time with no more capital added to the ISA, if the dividends get bigger. But dividends can be cut as well as grow. So the smart investor chooses their shares carefully.
One share I think income investors should consider at the moment is broadcaster ITV (LSE: ITV). It yields 6.2% and aims to hold or grow its dividend per share over time.
The company basically has two parts. One produces and distributes content, through its terrestrial TV channels as well as digitally. The other division rents out studios and assists other companies producing programmes.
ITV’s share price has tumbled 27% in five years. The City remains concerned about the risk of growth in digital media consumption, hurting ITV’s traditional business but also providing more competition for the company’s own digital efforts. That’s a risk to its advertising revenue and profits.
But with its strong media franchises, diversified activity, and deep advertising relationships, I reckon ITV could potentially keep generating spare cash for a long time to come.
Getting started now
The shares chosen will impact the plan’s success. But it’s also important to choose the right Stocks and Shares ISA, as fees and commissions can also eat into returns.
Something I like about this plan is that it’s pretty simple, but potentially lucrative.
It’s also fairly passive – but it does require at least some effort to get started!
