Ever thought about turning a Stocks and Shares ISA into a long-term passive income machine?
It’s possible. Warren Buffett has said that getting rich involves figuring out how to earn money in your sleep. Stuffing an ISA with a range of high-quality dividend shares can do exactly that.
A pound an hour, for life
For example, say you want to earn an average of one pound per hour for the rest of your life.
As there are 8,760 hours in a year, that works out at £8,760 per year in dividends.
At the moment, the FTSE 100 yields 2.9%. But I think with the right selection of shares even from within the blue-chip index, it’s possible to double that. So, we’re talking about a 5.8% yield.
To earn £8,760 a year at that yield would require an ISA with around £151k in it.
If someone already had that, they could start targeting passive income immediately. But it is also possible to build up to it.
Putting £20k a year into an ISA and compounding it at 5.8% each year, the ISA would only take six years to get to the desired size.
Choosing the right ISA
That would require some things to go according to plan, of course.
While I think a 5.8% dividend yield is achievable, there are no guarantees. Dividends can be cut, or cancelled. in that case, the income might not be for life.
Another factor that can eat into the rate of return is fees, commissions, and charges.
So it pays to take some time when choosing what Stocks and Shares ISA to use.
5.6% dividend yield and decades of annual increases
One share I think investors should consider for its passive income potential is 5.6% yielding British American Tobacco (LSE: BATS).
Not everyone is comfortable with the ethics of investing in the tobacco sector, of course. For those that are, I see some potential financial not just ethical concerns.
For example, declining cigarette sales volumes are already beginning to pinch at British American.
The first half of last year alone saw the company’s cigarette volumes fall 9% year on year. I see a risk such sizeable falls will continue due to regulatory changes and fewer people smoking cigarettes.
Still, even with that fall, British American still sold 229bn cigarettes in six months. This part of its business may be in decline but it remains very substantial.
Meanwhile, pricing power means the company can try to mitigate falling sales volumes with rising selling prices. On top of that, it has been expanding its non-cigarette nicotine business like vapes and snus.
British American Tobacco generates very large amounts of cash. It has grown its dividend per share every year for decades already and aims to keep doing so.
Whether that happens will depend on how much spare cash the company can generate over time. It also needs to service an adjusted net debt pile of around £30bn.
But as long as the company can navigate an evolving tobacco market successfully I reckon it has ongoing dividend growth potential.
