Put some money in a Stocks and Shares ISA, choose a few stocks, then sit back and grow passive income streams over the coming decade.
What’s wrong with that picture?
Actually: nothing is wrong with it!
It is possible to earn a four-figure annual passive income doing exactly what I said above. Not guaranteed (as dividends never are and they form the basis of this plan), but possible. Here’s how.
Sticking to businesses I know and understand
Say the investor spreads the £20k evenly across 10 companies, staying diversified. I am not talking here about tiny obscure companies, but proven, long-established blue-chip businesses.
At a 7% compound annual growth rate, such a portfolio ought to be worth around £39k a decade from today. At an 7% dividend yield, that would produce annual passive income streams of around £2,754.
Charges can eat into returns, so it is important to choose the right Stocks and Shares ISA.
Weighing risks and rewards
Those 10 shares should be diversified across a range of sectors.
A red hot FTSE 100 means that, while until recently a number of shares offered a yield of 7% or more, at the moment the only ones that do are Legal & General and Phoenix Group.
In the FTSE 250, Victrex (LSE: VCT), MONY Group, and PageGroup all currently offer yields above 8%. Some higher-yielding shares could mean someone hits the 7% target even including some shares yielding less than 7%.
There are other 7%+ yielders in the FTSE 250 too, including multiple investment trusts as well as shares with yields set to fall as dividends are cut: WPP is an example.
But above, I mentioned proven blue-chip shares. What that means may vary for different investors. With a wide range of yields available in both indexes, I think a 10-share portfolio yielding an average 7% is doable.
However, it is important to remember that a high yield can be a red flag that the City fears a possible dividend cut.
So care is required to prioritise smart share-picking over greed. No dividend is ever guaranteed to last. As a WPP shareholder, I know that all too well!
Passive income in practice
Lately, I have been adding to my existing shareholding in Victrex. A 69% share price drop in five years has pushed the FTSE 250 share’s dividend yield up to a whopping 8.4%.
But might this be fool’s gold?
After all, the dividend has been flat for years – hardly an encouraging sign.
The full-year dividend was maintained in December, but it was not covered by earnings. With a new boss taking over last month, I reckon the dividend could come under close scrutiny.
Still, Victrex’s proprietary polymer technology gives it pricing power when selling to clients who use it in critical applications like car safety.
Sales grew handily last year: volumes were up 12% last year. A trading update for the most recent quarter showed a sales volume decline, though. I am hoping that is a blip not a trend.
The problem is that average selling prices are down sharply, partly because Victrex is selling more low-margin products but demand for high-margin ones like its medical offering remain weak.
I see a risk that could continue, but reckon Victrex still has the bones of an excellent business.
