One use for a Stocks and Shares ISA is using it to build up passive income streams thanks to earning dividends from shares.
With a patient attitude, doing that can lead to substantial income streams over time.
For example, say someone had a £20k Stocks and Shares ISA and wanted to target £390 of dividend income per week. Here’s how they could ultimately aim for that goal.
A long-term approach can be powerful
£390 per week adds up to £20,280 per year. That is more than the contribution allowance for the ISA, so it may not seem realistic.
However, time can be the investor’s friend.
Rather than taking out dividends as passive income straight away, reinvesting them (known as compounding) can help build up a bigger potential source of dividends over time.
For example, if an investor can grow their Stocks and Shares ISA at a compound annual rate of 7% over 40 years, it will then be large enough that a 7% dividend yield would produce over £390 per week on average in dividends.
Of course, a 40-year timespan is a long wait even for sizeable passive income streams. The same plan could work on a shorter timeframe, but the target income would be correspondingly smaller.
Aiming for success
Is a 7% compound annual growth rate realistic? I think so, as it includes dividends and also capital gains, albeit capital losses would eat into the return achieved.
What about a 7% dividend yield? In today’s market I think that is achievable even when sticking to proven blue-chip businesses.
Another factor to consider is costs and fees such as commissions and annual charges levied by an investing platform provider.
Over time they could add up. That means it pays to take time when selecting the right Stocks and Shares ISA. Even for an existing ISA holder, the upcoming annual contribution deadline means some providers are offering promotions that could make it worth checking out the market to compare possible alternatives.
One share to consider
At the moment, one income share I think merits investors’ consideration for its long-term dividend prospects is asset manager M&G (LSE: MNG).
The share yields 7.5%, so if someone invested today, hopefully they would earn that yield in coming years.
In fact, they could do better, as M&G has what is known as a progressive dividend policy, meaning it aims to increase its payout per share each year. It has done that over the past few years.
Things could go the other way, though. No dividend is ever guaranteed (which is one reason it always makes sense to diversify a Stocks and Shares ISA across different shares).
One risk to the M&G payout is policyholders pulling money out due to volatile market conditions, hurting earnings. In the current market environment, with a lot of geopolitical volatility, that risk is on my mind.
Still, from a long-term perspective, M&G’s proven business model, large customer base, and deep experience in asset management are all assets that could help keep it doing well.
The brand is well-known and well-respected and millions of investors are customers. That makes for what I see as an attractive business.
