Ever thought about drip feeding money into a Stocks and Shares ISA as a way to try and build passive income streams? Lots of people do it and it can be a fairly simple way to earn some extra cash without having to work for it.
Let’s have a look at what that could mean for someone who is currently 35, has an empty ISA (or no ISA at all) and can spare £15 a day to put into one.
Keeping things simple
In this illustration, I will presume a 5% ‘dividend yield‘. Yield is what you earn from the shares in your ISA annually, expressed as a percentage of what they cost.
There can be a temptation – an understandable one, I feel – to plump for high-yielding shares. But as dividends are never guaranteed, and an unusually high yield can be a red flag that investors fear a cut.
That can happen even with low-yielding shares though, so in every case it is always important to look at the quality of a business. How sustainable does its dividend look, based on its likely future free cash flows?
Five percent is well above the FTSE 100 yield (currently 3.1%), but I do see it as realistic while sticking to proven blue-chip firms.
In my example I am presuming a 5% yield. Bear in mind that, in reality, dealing fees, commissions and other charges can eat into an ISA. So it makes good sense to compare some of the many available options when choosing one.
Income streams can grow over time
Putting £15 a day (£5,475 a year) into a Stocks and Shares ISA from 35 onwards, here are the likely passive income streams based on that 5% target yield.
At 45 – £2,737 a year, at 55 £5,475. a year and by 65, an annual passive income of £8,212.
Earning more income for the same contribution
It would be possible ultimately to earn bigger passive income streams doing exactly the same thing but with one change – initially reinvesting the dividends instead of taking them as passive income.
That is known as compounding. It can be a powerful force multiplier. If someone did that and started drawing the passive income at 45, it would be £3,443 at that point (and ought to keep growing even as they stop compounding, thanks to ongoing contributions).
Waiting until 55 should mean annual passive income of £9,051. For someone patient enough to wait until 65 to begin drawing the income, it should be a yearly total of £18,187.
Every investor’s different
Compounding might not be for everyone. Some investors are keen to start earning passive income immediately!
Either way, one share I think is worth considering for its income potential is broadcaster ITV (LSE: ITV). It aims to maintain its annual dividend per share at least as its current level. It currently has a juicy yield of 6.6%.
A key risk here is declining advertising revenue. In weak economic periods, advertisers tend to spend less. Digital proliferation is an ongoing risk to ITV’s ad revenue as well, due to its terrestrial footprint.
But ITV has been growing its digital offer. It has lots of content and advertiser relationships that can help. The company also has a large studios and production business, generating sizeable non-advertising related revenue streams.
