Earning a passive income by investing money in a Stocks and Shares ISA could be an attractive option at the present time. After all, the stock market crash has caused many dividend shares across the FTSE 100 and FTSE 250 to trade at low prices. As a result, they offer high dividend yields in many cases.
At the same time, low interest rates mean income returns on cash and bonds are at extremely low levels. Similarly, high house prices mean that buy-to-let investment offers low yields.
As such, now could be the right time to buy a diverse selection of UK dividend shares for the long run.
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Investing in dividend shares to earn a passive income
The FTSE 100 currently offers a passive income of around 4.7% per year. That’s significantly higher than the sub-1% returns available on most cash savings accounts. It’s also likely to be higher than the yields on investment grade bonds. And also the net return available on buy-to-let property while UK house prices are at record highs.
However, simply buying high-yielding dividend shares in an ISA may not necessarily maximise an investor’s income returns. Some higher-yielding shares may be struggling to afford their dividend payouts. They may be experiencing challenging operating conditions that are negatively impacting on their financial performances.
Therefore, it’s important to ensure that any dividend shares purchased in an ISA offer a sustainable passive income. For example, checking how many times they can pay dividends with net profit, as well as their balance sheet strength, could lead to a more resilient income stream in the long run.
Investing money to build a diverse ISA of dividend stocks
Even selecting those FTSE 100 and FTSE 250 shares that have solid dividends doesn’t guarantee a resilient passive income. Unexpected events can occur to any company operating in any industry. Therefore, it’s crucial to build an ISA portfolio that contains a diverse range of companies operating in a number of different industries.
Diversification not only reduces the risk of being over-reliant on a small number of stocks for an income return. It also provides access to a wider range of growth opportunities. This may lead to a stronger rate of dividend growth over the long run that produces a more attractive passive income within an ISA.
Starting to invest money today
Clearly, the 2020 stock market crash may dissuade some investors from buying shares in an ISA for a passive income. However, the track record of equity markets suggests that a long-term stock market and economic recovery seems likely. As such, now could be the right time to buy a selection of high-yielding stocks from across both the FTSE 100 and FTSE 250. That way you can enjoy a growing income return in the coming years.
