The Stocks and Shares ISA‘s a great tool I make use of, alongside millions of other UK investors. Although my ISA’s a mix of different types of stocks, I could specifically focus on buying dividend shares to generate passive income over time.
Based on some juicy dividend yields on offer right now, here’s how I could make some decent money.
Squeezing the lemon
The first element to this strategy is putting all of my attention and money to income generating shares. My ISA limit’s £20k a year. This isn’t free money given to me, rather it means I can invest up to £20k to still be able to enjoy the tax benefits associated with the ISA.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
I might not be able to afford to invest each month to finish the £20k, but for the purpose of this strategy I’m going to assume that I can. In order to maximise my potential, I want to pick the top dividend stocks each month. This list changes from month to month, which is why I’m not going to invest everything in one go. Being nimble allows me to jump on opportunities as they arise.
Any dividends I receive I’ll reinvest back into the stock market. This means I can benefit from compounding, helping my future income stream to build faster. Further, by using my ISA, I don’t have to pay dividend tax, meaning I get to keep more of the gross payment.
Targeting high yields
I feel I can buy shares with a high yield that are also sustainable in nature. A good example I might consider is Taylor Maritime Investments (LSE:TMIP). The investment trust has a dividend yield of 7.89%, with the share price increasing by 3% over the past year. I’m thinking about adding the stock to my portfolio.
The trust’s a specialist dry bulk shipping investment company. It owns a fleet of vessels which it aims to make money from both from capital appreciation but also from steady income. The income comes from the fact that the boats are usually employed on fixed period charters.
Such charters can be a reliable source of revenue. In the latest quarterly update, it noted that the average time charter equivalent was £11,141 a day. This was up 12% from the same quarter last year. The dividend cover’s currently around 2, meaning that the dividends are sustainable and not eating into earnings too much.
As a risk, these kind of vessels tend to depreciate over time. The firm aims to buy second-hand boats it believes are undervalued. However, this might not always be the case and is something I need to be aware of.
Looking at the numbers
If I was able to build a portfolio of stocks with an average yield of 7.5% and used up the £20k limit each year, my pot would quickly grow. After a decade, my portfolio could be worth £299,950. This means that in the following year, I could stand to bank £1,874 a month.
