What would you do with the equivalent of £1k a week of passive income flowing into a Stocks and Shares ISA? It’s an intriguing thought.
For most, however, it might appear little more than a daydream. After all, it equates to £52k a year. Most people don’t have that much to invest, let alone possess a portfolio big enough to generate it in passive income.
So, how realistic is it?
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The long game
How big an ISA would have to be to throw off £52k a year would come down to the size of the dividend yield.
For example, a portfolio with a 6% yield would need to be worth approximately £867,000. Not only is that a hefty sum, it also far exceeds the annual £20,000 Stocks and Shares ISA contribution limit.
Therefore, even if one had £867k to invest upfront, only a fraction of that could be invested tax-free straight away. By necessity then, most investors are compelled to play the long game.
But the good news is that there are some benefits to doing this. The main one is that it becomes impossible to mistime the market. For example, if someone is investing £700 per month come rain or shine, they will be buying when the market is up, down and flat.
Crucially, they will be investing when stocks are down and dividend yields are higher. History shows the very best time to invest is after a stock market crash.
In contrast, a person who invests a large sum may do so just before the stock market tanks. And if they’re new to investing, they may make beginner mistakes that a longer-term investor would learn to avoid.
How long?
Sticking with the example of investing £700 a month, it would take just over 25 years to reach £867,000. This assumes an average total return of 9.5%, with dividends reinvested.
This return isn’t guranteed, of course, and individual dividends are far from bullet-proof. But it is the annualised total return of the FTSE 100 index over the past decade, so it’s not an unrealistic ballpark figure to aim for.
Finally, it goes without saying that £52k will buy less in 25 years than it does today. Then again, rising inflation arguably makes a future income stream even more necessary.
FTSE 250 dividend stock
One example of a dividend stock to consider for an ISA is Hollywood Bowl (LSE:BOWL). As the largest ten-pin bowling operator in the UK and Canada, it has a strong brand and plenty of repeat business.
Last year, revenue increased 8.8% to £251m, while average spend per game rose to £12.04 from £11.05 the year before. The FTSE 250 firm opened 7 new locations, bringing the total to 92. It intends to have 130 centres by 2035, including strong expansion in Canada.
Naturally, inflation adds risk. If people’s energy, fuel and food bills go up, they may have less disposable income for a game of bowling.
That said, the experience is competitively priced. A family of four can sometimes bowl for under £26 during peak times, and Hollywood Bowl is expanding its electric go-karting and mini-golf offerings.
After falling 26% in two years, the stock’s trading cheaply at 10.6 times forward earnings. And there’s a forward dividend yield of 5.5% on offer.
