As the annual Stocks and Shares ISA deadline fast approaches, I think acting on it offers me a way to boost my passive income by £1,000 a year. Here is how.
What is the ISA deadline?
Every year there is a deadline for putting funds into my ISA. That does not mean I need to invest those funds immediately. Indeed, I could simply put them in the ISA and then wait months or even years before using them to buy stocks and shares. But if I have not used up my remaining allowance by the ISA deadline, I will lose it. I will be able to start again with a new Stocks and Shares ISA allowance in that year, but the unused part of my old allowance will not be available for me to pay in any longer.
So, rather than waiting until I have ideas for shares I want to buy, I would consider parking money today in my Stocks and Shares ISA. That way, I will be able to use it to buy shares in the next tax year or beyond, without eating into my future Stocks and Share ISA allowance.
Using an ISA to generate passive income streams
Specifically, I would use my ISA to set up passive income streams. There are a few reasons I think this could be a rewarding move for me.
The first one is that buying shares can provide a genuinely passive source of tax-free passive income. The dividends I will hopefully receive require no work from me. I can just buy the shares, sit back and wait hoping for dividends to start piling up in my ISA.
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Secondly, I think an ISA is a good structure to help me focus some of my funds on passive income. I cannot just endlessly put money in, take it out then add it back in whenever I want. Once I reach my annual limit of funds to put in the ISA, my contributions will be capped. I think that could help me apply the sort of long-term buy-and-hold investing mindset that I see as the cornerstone of a passive income investment strategy. Putting money in my ISA today, investing it in the coming months then waiting for my passive income streams to build up could help me increase my earnings without needing to spend a lot of time on it.
Targeting £1,000 of passive income each year
Shares that pay dividends have what is known as a yield. It is an expression of the dividend income as a percentage of what I pay for the shares. So, if I pay £100 for a share and it pays me £5 a year in dividend income, its yield is said to be 5%.
If I had £20,000 and wanted to target a £1,000 annual passive income, I could put the £20,000 into my Stocks and Shares ISA deadline today, before the deadline. Then I could invest it – now or later – in shares with an average dividend yield of 5%.
As it is an average, I might choose some shares with a higher yield but also some with a lower one. I would be sure to spread my choice across a variety of shares and business sectors. That is because dividends are never guaranteed. Even a past solid performer can suddenly cut its dividend for the first time in decades, as Shell did in 2020. So by spreading my choices, I would reduce the risk posed to my passive income streams if any one share changes its dividend in future.
5 dividend shares to buy now
Once the £20,000 is in my Stocks and Shares ISA, I do not need to invest it immediately, as I said. But I may do so, as right now I think I can buy some good dividend shares at attractive prices. I would invest £20,000 by splitting it equally among the five shares below for an average yield of 5.0%.
My first pick would the consumer goods manufacturer Unilever. With its portfolio of premium brands including Knorr and Comfort, the company has pricing power that can help it offset the impact of cost inflation on its profit margins. Its global business offers opportunities for future revenue growth. Unilever offers a dividend of 4.1%.
Next I would buy the financial services company Legal & General. It has a well-established business that benefits from its iconic umbrella brand attracting customers over many years. Financial services can be both rewarding and risky. The sizeable sums involved and resilient customer demand can be rewarding for a company like Legal & General. But events such as storms can push up claims settlement costs, hurting profits. Yet I would still buy Legal & General shares for my ISA to benefit from its 6.5% yield.
I would also invest in the chemicals specialist Victrex. This industrial business manufactures polymers and exports them worldwide for use in a variety of applications. It benefits from proprietary technology. Rising input costs as energy prices increase could hurt profit margins. But I hope the company’s customer base can absorb such inflation in the form of higher purchase prices. Victrex shares yield 3.3%.
The fourth share I would buy is energy distributor National Grid. Many income investors like utilities because of their relatively resilient customer demand. That can help provide ongoing cash flows and dividends. A growing focus on electricity means National Grid’s income sources are set to become less diversified. That could be bad if electricity prices tumble, but it could also be positive as the company has proven expertise in the field. The yield is 4.3%.
Finally I would invest in British American Tobacco. The economics of the tobacco industry involve low manufacturing costs and the ability to charge customers a premium price thanks to brands such as Lucky Strike. That can help generate big free cash flows to fund dividends. Declining cigarette usage threatens revenues and profits. However, I see the vast business as a lucrative choice for my portfolio, offering a yield of 6.7%. Dividends are never assured, but the firm has increased its payout annually for over two decades. I have added to my British American holding before this year’s ISA deadline.