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Putting money into a Stocks and Shares ISA then using it to purchase dividend shares is one way to try and grow passive income streams.
It can be lucrative. But how much money is required?
Doing the maths
Let’s take a target of £1,000 a month of income. Over a year, that would be £12k. If an investor was able to achieve an average 6% dividend yield in their Stocks and Shares ISA, that would require an investment of £200k. A higher yield could require a lower sum, but in this example I will stick to 6%.
Compounding along the way
That would mean maxing out the annual ISA contribution allowance for a decade, for most people.
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A somewhat quicker way could be reinvesting dividends along the way, rather than taking them out as income.
Investing £20k a year like that and compounding the dividends at 6% annually would mean the ISA should be worth almost £230k after nine years. At a 6% dividend yield, that would produce more than £1a month on average in passive income.
Choosing the right approach
Six percent is well above the current FTSE 100 average yield of 3.3%, but I think it is achievable in the current market.
Partly that depends on choosing the right shares. But before even getting onto that, there is another factor that can impact total return: choosing the right Stocks and Shares ISA.
Over a period of many years, the fees and charges of an ISA can add up substantially, so it is worth taking time to make a smart choice when choosing one.
Finding shares to buy
A critical factor in the success of such a passive income plan is to buy the right shares. I use the plural because diversification is important. No matter how great a share may seem, any business can run into unexpected challenges.
One share I think investors should consider at the moment is asset manager M&G (LSE: MNG). It has a strong brand associated with long experience in its field. The market for asset management is huge and likely to stay that way.
M&G has a customer base in the millions, across multiple markets worldwide. It has both retail and institutional investors.
One of the risks I saw in recent years for M&G was investors withdrawing more money from its open funds than they invested. That is still a risk though in the first half the company reassuringly reported net inflows.
The FTSE 100 business has proven it can be highly generative. That is very handy when it comes to paying a dividend. Indeed, it aims to grow its dividend per share each year.
That is not guaranteed to happen as no dividend ever is. But M&G has been able to deliver on that aspiration in recent years and its current dividend yield of 8% is well above the 6% target mentioned above.
