As a long-term investor, I try to focus on investments with a timeframe of years, or even decades, not just months. A Stocks and Shares ISA can be a good vehicle for me to do that.
If I wanted to invest £20,000 in my Stocks and Shares ISA today to try and target extra income for the rest of my life, here is how I would go about it.
Focus on quality of income not just quantity
There are lots of shares I could buy for my ISA today that have a high dividend yield. Even in the FTSE 100 alone there are names like Persimmon with its 18.9% yield and Rio Tinto on 10.5%.
Are these yields sustainable? As with any dividend, nothing is ever guaranteed. Housing market and metal price falls could hurt the dividend at both companies. That is one of the risks of investing in cyclical industries.
That does not mean I would not buy those shares. I have been eyeing Persimmon as a possible addition to my portfolio for a while, in fact. But it does highlight that chasing yield alone can be a dangerous game. Often, shares with high yields have had their price marked down for a reason. For example, the City may think their current payout is unsustainable.
So instead of starting with yield, I always begin by looking for great businesses with a competitive advantage I think can help them do well in future. That could form the basis of profits the firm may choose to pay out as dividends. Only if I thought a company had such characteristics would I consider adding it to my Stocks and Shares ISA.
Spread my choices
However, a company that looks promising can run into unexpected challenges that affect its ability to pay dividends. Or it might simply change strategy and start using excess cash for a purpose other than dividends, such as funding growth.
So I always diversify my ISA across a number of different companies. £20,000 is ample for this and I could spread the money evenly across five to 10 different shares.
Building tomorrow’s Stocks and Shares ISA today
With the objective of earning extra income for the rest of my life I would not want to invest in companies whose heyday looks like it might be coming to an end.
So once I had my list of investment ideas, I would consider what the world might look like in 20, 30, or 50 years. Would that make any difference to my perception of those companies’ prospects?
Guessing what the future might look like decades out is a tough challenge, so I would try to keep things simple. People will still need to eat and drink. They will need places to live. They will need power and heating.
If I can find highly cash generative companies with a strong position in an industry for which I expect long-term demand, they could be the sort of shares I want to own in my Stocks and Shares ISA.