One of the attractions to me of investing in a Stocks and Shares ISA is that it could help me build up long-term dividend streams. That could be a handy supplement to my income for years to come.
If I had £20,000 to invest in a Stocks and Shares ISA today and wanted to set up annual dividend streams of £1,000, here is how I would attempt to do it.
Focus on the long term
I think investing today means it is possible to earn dividend income for the rest of my life. But for that to be the case, two things will need to happen. The companies in which I invest need to survive – and they must keep paying dividends.
If I invest in a diversified range of businesses, it might not affect me too much if one of them disappears or stops paying its dividend. But in broad terms, long-term income will require me to pick wisely today rather than focus on short-term fads.
I would therefore hunt for businesses I expect to be around and in rude health a decade from now. For example, I would concentrate on areas where I expect high customer demand and in which a business has a certain competitive advantage.
That might be the installed customer base of Vodafone, the strong brands of Diageo, or the network of Jersey Electricity. Whatever it is, taking a long-term view on dividend income means I am looking for companies I think could be money-making machines many years from now.
Managing my risk
Diversifying my Stocks and Shares ISA will help me reduce my risk. But I also need to consider the risk of each individual share I buy.
Generating £1,000 from a £20,000 ISA would require an average dividend yield of 5%. I think that is appealing because it seems achievable. Although all shares carry risks, 5% is not the sort of yield I could only get by dipping into the very risky end of the market.
Right now, a number of blue-chip firms have a yield of 5%. For example, firms such as Vodafone, Aviva and Sainsbury’s all yield that percentage, or higher.
As 5% is the average yield I would need to aim for to hit my annual £1,000 annual target, I do not even need to buy only shares that yield 5%. I could add in some blue-chips yielding 3% or 4%, as long as the overall average came out at 5%.
In any case, I would always focus first on finding what I think are great companies. That is different to buying companies just because of their yield.
Growing income from my Stocks and Shares ISA
If I find great companies with a competitive advantage in a growing market, over time their profits could hopefully get bigger. So I may perhaps end up with more than £1,000 in annual income from my initial investment in years to come.
Dividends are never guaranteed though. That is why I would spend time hunting for those brilliant shares to buy.