A Stocks and Shares ISA can be a good way to buy shares and hold them while anticipating their long-term price growth prospects. But I also find an ISA can be a convenient investment vehicle through which I aim to boost my passive income streams by investing in dividend shares.
Here is how I would invest £20,000 through a Stocks and Shares ISA to target a monthly dividend income of £135.
Setting an annual target
If I wanted to earn £135 per month, across the whole year my target would be £1,620 of dividend income. Different companies pay out dividends on their own schedules. So realistically, I would see my target of £135 as a monthly average rather than the exact amount I would expect to receive every month.
Understanding dividend yield
So, how would I know whether I might hope to hit the annual target of £1,620 in dividends?
That would depend on the average dividend yield of the shares I bought for my Stocks and Shares ISA. Yield is basically an expression of the dividends I ought to receive each year as a percentage of my purchase price. So, for example, a 5% yield means that for every £100 I invest in shares I would hopefully receive £5 in dividends each year.
£1,620 is 8.1% of £20,000. So, if I invested £20,000 in shares with an average dividend yield of 8.1% or higher, I ought to hit my target.
Dividends and risk
However, dividends lack the certainty of some other investment returns, such as bank interest. Just because a share has an 8.1% dividend yield when I buy it does not mean that the dividends will continue at that level, or at all.
If business worsens, for example, the company may decide to reduce or cancel its dividend. Even large firms like Shell and Imperial Brands have done this in recent years. Equally, the company may increase its dividend on the back of robust business performance. Firms including Diageo and DCC have increased their dividends annually for decades.
Making selections for my Stocks and Shares ISA
That helps explain why I would diversify my Stocks and Shares ISA across a number of different companies. £20,000 is comfortably enough to let me split the money evenly across five or even 10 different companies.
I would also take care to hunt for shares with the characteristics I wanted. So rather than rush my selection, I would look for companies I understood I thought had a business model that could help them to pay out dividends for years or decades to come.
Focus on quality
In doing so, there is always a risk that I make a mistake – or get greedy.
Chasing yield alone could lead me into value traps, such as shares with a high dividend that gets cut after I invest. So I would always focus on quality when it came to investing through my Stocks and Shares ISA. I believe I could generate £135 each month in dividend income – but realistically it may take me time to select the right portfolio to do that.