Just days away from the annual contribution deadline for a Stocks and Shares ISA, now seems the perfect time to think not only about what money to put into an ISA but also how to use it.
The contribution deadline is exactly as it sounds: it is the last date on which this year’s contribution allowance remains open. Once money is in the ISA, it can be invested at leisure to target those tax-free gains.
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One option to consider is using an ISA to try and generate sizeable passive income streams. I can illustrate that by using a hypothetical example.
A £989 passive income each month
Say someone makes the most of their standard ISA contribution allowance, putting in £20k a year, and they compound the ISA’s value at 6% a year.
Doing so, after eight years, the Stocks and Shares ISA ought to be worth just under £198k.
At a 6% dividend yield, that should produce an average monthly passive income of £989.
Income, but perhaps also growth
What would make up that compound annual growth rate?
Dividends might be the first thing to come to mind. But share price growth could also be a positive factor, albeit that may be offset by any share price declines.
That 6% figure is around double the current FTSE 100 dividend yield.
So, is it realistic while sticking to well-established businesses with proven commercial models? In the current market, I think it is.
One long-term dividend payer I like
To reduce risk, the portfolio ought to be diversified. No matter how good a company is, it can run into unexpected challenges. Spreading risk by owning shares in a few different companies can help to mitigate that.
One share I think merits consideration at the moment for its passive income potential is US foods giant Campbell’s (NASDAQ: CPB), best known for its eponymous soups but also home to brands such as Pepperidge Farms.
The dividend yield currently stands at 7%. That seems improbably high to me for a company of this calibre and proven cash generation ability.
So, what is going on?
The share price is down 44% in a year. Shifting consumer trends raise a risk that packaged, processed foods that are core to the Campbell’s business could see sales decline. The experience of Kraft Heinz is instructive in this regard.
In Campbell’s latest reported quarter, its net sales revenues fell 5% year on year.
Still, selling for 12 times earnings, I think the current share price already factors in such risks.
Campbell’s has iconic brands, deep manufacturing and distribution expertise, strong grocery trade relationships and a proven ability to generate sizeable free cash flows.
I would not be surprised to see its share price continue to move around. But, from a long-term perspective, I think it looks like a possible bargain to consider – with a very tasty dividend yield to boot.
