Using a Stocks and Shares ISA to earn dividends is a great idea, in my opinion. Not only will the cash received escape the clutches of the HRMC, but it’s also possible to start earning a second income stream quickly.
Here’s how.
A high-yielding example
Whenever a company declares a dividend, it will also specify an ex-dividend date. Those who buy shares on or after this date are not entitled to the dividend. Instead, it goes to the seller.
Using BP (LSE:BP.) as an example, when it declared its Q3 2025 payout of 8.32 cents a share (6.2394p to be precise), it decided that 13 November 2025 would be the ex-dividend date and that shareholders would receive the cash on 19 December 2025.
This meant anyone holding £20,000 of shares in an ISA (the most that can be invested in a tax year) just before the ex-dividend date, would have received a payout of £266.64 a few days before Christmas. That’s a nice return for doing very little. Remember, this is not subject to tax. And it means some new shareholders would have started earning passive income only five weeks after first investing.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Buyer beware
Of course, it’s not a win-win situation. When a stock goes ex-dividend, its price goes down to reflect the lack of entitlement to the payout. But that doesn’t really concern income investors. As long as the dividend cheques keep coming and, hopefully, steadily increase over time, they are generally happy.
However, BP’s also a good example of why dividends cannot be taken for granted. As they are a distribution of profit, they can move in line with earnings. During the pandemic, when energy prices hit the floor, the group cut its payout by 50%.
On the up
But over the past five years, it’s been gradually increased. The stock’s presently (30 January) yielding 5.3%. This means a £20,000 investment could earn £1,060 a year in passive income.
And I’m hopeful that BP will soon restore its dividend to its pre-pandemic level.
That’s because it’s seeking to address some of the issues that have seen its share price lag behind that of many of its international rivals over the past five years or so. Importantly, it’s trying to become more efficient and match the margins achieved by some of its larger peers.
It’s also seeking to pay down its large debt through the disposal of non-core assets, which should reduce borrowing costs and also help improve its bottom line and free cash flow. If this all works, it should leave more left over to cover higher dividend payments. In December 2025, it announced it was selling a 65% stake in Castrol for $6bn. All of the proceeds will be used to repay debt.
But the prices of oil and gas remains outside the control of BP. These are determined by numerous economic, political, and environmental factors, many of which are unpredictable. That’s why earnings in the sector can be more volatile than in other industries.
However, if BP can close the efficiency gap and reduce its gearing, its earnings should improve relative to others in the industry, regardless of what happens to energy prices. Despite the risks associated with the sector, I think BP’s a share to consider by those looking for passive income opportunities.
