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Thinking of setting up some passive income streams by investing in dividends shares? Lots of people use their ISA that way – and the income streams can be substantial.
Let’s get into what sort of funds someone would need in an ISA to target a monthly passive income of £3k-£5k.
The maths of income shares
That equates to £36k-£60k per year in passive income. Those are not small numbers.
The amount of money required to target that amount would depend on what average dividend yield is achieved. At a 10% yield, it would be £360k–£600k.
But a 10% yield’s exceptional, at over triple the current average yield of the FTSE 100.
So in this example, let’s use a 7% yield. I think that’s achievable in the current market.
At a 7% yield, the ISA would need £514k for a £3k monthly passive income, while pushing that up to a £5k monthly income would require some £857k in the ISA.
Using an ISA over the long term
For most investors there is an annual contribution allowance of £20k.
Someone could put £20k in a year and then aim to compound it at 7%. Doing that for 16 years would allow the ISA to get to the right size to target the £3k monthly passive income.
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With lots of different Stocks and Shares ISAs on the market, the smart passive income hunter will take some time to decide what one is best for them.
Looking for dividend shares to buy
I said above that I think a 7% yield’s achievable.
An example of one share I think investors should consider is Legal & General (LSE: LGEN). The FTSE 100 financial services company has been around for a long time, but it has moved with the ages.
These days its strategic focus in on retirement-linked products. That is a lucrative, large, and resilient market.
With its existing customer base and proven business model, I reckon Legal & General has the potential to go on generating large amounts of surplus cash in the future. That could help it achieve its goal of growing its dividend per share each year.
Will it manage to do that? The sale of a large US business ought to generate some short-term cash, but will lead to lower revenues.
There are other long-term risks to profits too. Legal & General’s last dividend cut was in the 2008 financial crisis. I see a risk that any future financial downturn could see more of the company’s clients cashing in their policies, hurting fee income for the firm.
From a long-term perspective, though, I think there is a lot to like about the business. The 8.4% dividend yield certainly grabs my attention!
