Investing in a Stocks and Shares ISA can expose me to some large and very successful companies. That might help me ride the growth of industries from lithium to digital services. But I could also use my ISA to target dividend income, rather than going for growth as my priority.
Imagine that I wanted to make a four-figure annual passive income by putting £20,000 into an ISA now and then spending little time on it in future. Here is how I would go about it.
Dividends now, dividends later
With income my objective, the question I would ask myself in selecting shares to buy is which chosen companies would have a profitable business model both now and in the future? That matters because it takes money to pay dividends. And if a company cannot make a profit most of the time, it will not be in a position to do so.
We do not know what companies will be profitable in future and indeed that is one reason I would spread my £20,000 across five to 10 different shares rather than concentrating too much of my money in one or two.
But although the future is uncertain, I think some educated guesses can go a long way. For example, which industries will continue to see high demand in future? One I expect to stay around is insurance, which is why I would happily consider financial service providers like Direct Line or Legal & General for my Stocks and Shares ISA.
Then I would ask whether a company had a suitable business model to cash in on such demand. So I would look for something that could help set it apart from competitors, such as a famous brand, or unique piece of technology. I would also look at each company’s balance sheet. If a business is saddled with too much debt, that could eat up profits that might otherwise fund dividends.
Target yield
To get a four-figure annual yield, I would need to invest £20,000 in shares with an average yield of at least 5%. Right now I think that would be straightforward for me to do. There are lots of blue-chip shares yielding 5%. And as some offer more, I could also invest in 4% or 3% yielders while still hitting my target average.
The key thing I want to avoid though is making investment choices for my Stocks and Shares ISA purely on the basis of yield. I only aim to buy great companies I think can be profitable in future and trade at an attractive valuation. Even if a share has a juicy yield, buying it for the wrong reasons could turn out to be a costly mistake.
Monitoring my Stocks and Shares ISA
If I choose companies well using a long-term investing mindset, and hit my dividend income target, ought I then to keep trading the shares?
For me, the answer is no. I would occasionally check my portfolio and see whether anything had happened that might change the investment case for the shares I had chosen. In that case I may sell some shares and buy other ones. But otherwise, I would simply sit back and let the income roll in.
The post How I’d invest £20k in a Stocks and Shares ISA to target a 4-figure dividend income appeared first on The Motley Fool UK.
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.