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Ever wondered about the passive income potential of stuffing a Stocks and Shares ISA full of dividend payers?
Lots of blue-chip companies with well-proven business models are generous dividend payers. That strikes me as an opportunity.
Thousands upon thousands of pounds in potential
How much a Stocks and Shares ISA could earn in passive income over time would depend on how much is in it and what dividend yield it earns.
Dividend yield is not a complicated concept. It basically means how much someone expects to earn in dividends each year, expressed as a percentage of what the shares cost.
At the moment, for example, the FTSE 100 index yields 2.9%. At that yield, a £20k Stocks and Shares ISA ought to earn £580 per year in dividends.
Over 20 years, that annual amount would add up to passive income of £11,600.
Raising the income level
But that FTSE 100 number is only an average.
Not all shares pay dividends. Some companies lower or cancel their dividends.
That is a risk to the passive income streams – but it is also an opportunity. Some companies increast their dividends over time.
By investing in companies that end up growing their dividends over time, the Stocks and Shares ISA could generate more passive income each year, without needing any further investment.
Another way to boost the income streams versus my example above would be to achieve a higher yield. For example, at a 5% yield, the ISA would earn £1k per year in passive income. Over 20 years that would be £20k.
What about dividend growth? Say that happens at the fairly modest rate of 3% per year, from the initial 5% yield. That would mean that, over 20 years, the Stocks and Shares ISA generated around £26,870 in passive income.
Choosing the right Stocks and Shares ISA
One potential drag on returns would be fees, commissions, and charges levied by the stockbroker providing the ISA platform.
So it makes sense to compare some of the many Stocks and Shares ISAs on the market, to see what one seems most attractive. Different investors have different needs.
One share I am hanging onto
At 4.9%, the yield offered by distiller and brewer Diageo (LSE: DGE) is close to the 5% I used in my example above.
Not only that, but the FTSE 100 company has grown its dividend per share annually for over three decades.
That has been made possible by strong demand for alcoholic drinks, combined with Diageo’s portfolio of premium brands like Guinness.
But customers’ thirst for booze is falling across many markets. That poses a risk to sales volumes and profits.
That is already eating into premium white spirit demand. While Guinness continues to do well, the bigger picture worldwide is one of falling beer consumption.
If Diageo can successfully battle those challenges, it may be able to keep growing its dividend per share each year. But with a tough environment for the drinks industry, that is not guaranteed.
Still, I own Diageo in my portfolio and have no plans to sell it.
