In theory, stuffing a Stocks and Shares ISA with dividend shares as a way to set up passive income streams sounds simple.
In practice, of course, there are a few things to think about when deciding how one might try to put such an approach into action.
How much money is needed, for example, and what sort of shares might work well for such a scheme?
Yield determines income
In short, how much someone earns depends how on the size of their Stocks and Shares ISA and the average dividend yield it generates.
Yield is basically what somebody earns per year in dividends from the shares they own, expressed as a percentage of their purchase cost.
For example, say an investor wants to target monthly passive income of £500. That adds up to £6,000 per year.
To keep things simple, consider a 6% yield. At that level, the Stocks and Shares ISA would need £100k in it to hit the income target.
Getting down to brass tacks
I used 6% as an example but I do think it is realistic.
It is around double the current FTSE 100 average yield, admittedly. But there are quite a few FTSE shares that yield 6% or above. Plus, as it is an average, some shares could yield less, as long as the average is hit overall. A well-constructed Stocks and Shares ISA ought to be diversified.
Now, £100k is five times the typical annual ISA contribution allowance.
If someone had a spare £100k in an ISA, they could use that.
Alternatively, an investor could build up over years, either drawing the dividends as passive income along the way or else reinvesting (compounding) them at first to try and speed up progress towards the £100k.
An income share to consider
One FTSE 100 share I think investors should consider yields well above 6%. 7.8%, to be precise.
That share is Legal & General (LSE: LGEN). The financial services provider aims to grow its dividend per share annually by 2%, although as with any share, dividends are never guaranteed.
I think the company has quite a few factors going in its favour. It operates in the retirement-focussed space. Not only is that large, it is resilient and likely to stay that way.
With a powerful and long-established brand, Legal & General has been able to carve itself a distinctive place in that market. It has a large client base and a proven business model.
That is why it has been able to pay substantial dividends for many years. It last cut its payout during the 2008 financial crisis.
The firm confirmed this month that it has completed the sale of a large US insurance business, expected to generate a profit of over £1.3bn.
Such a profit could help fund the dividend. But the sale will likely mean a fall in revenues as Legal & General has got rid of a sizable business.
That is a risk, but I do regard the share as one for income investors to consider.
