A Stocks and Shares ISA can be a useful way to tuck away some investments, hoping for long-term price gain. So putting £20,000 into one today might mean I have a portfolio worth a lot more than that a few years down the line, although things do not always turn out that way.
But an ISA can also be a good way to try and build some regular passive income streams. To do that, I would invest in shares I felt looked likely to pay big dividends in years to come.
In the current market, I see lots of opportunities.
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If I had a spare £20,000 in my Stocks and Shares ISA right now, I would be happy to split it evenly across the handful of FTSE 100 shares below. That would hopefully earn me £1,700 in dividends next year.
Dividends are never guaranteed. But if they are maintained or raised, I could potentially earn around £1,700 or more from my ISA not only next year but for years or even decades to come.
Choosing the shares
What would my five shares be? Two are financial services companies with well-known brands and large customer bases: Legal & General and M&G.
They currently yield 8.8% and 9.8% respectively. Rocky financial markets could lead to lower revenues and profits at both. But each firm raised its annual dividend this year and I think they have staying power in their respective markets.
I would also buy into Lucky Strike maker British American Tobacco, with its 9% yield. The dividend has grown annually for decades. Declining cigarette usage could hurt profits, but then again, large increases in vaping sales could help the firm.
Next on my list would be telecoms giant Vodafone. It yields 10%, which for a FSTE 100 business is unusually high. Clearly some investors are worried that the company’s debt pile could lead it to cut the costly dividend. An announcement this week that its Spanish business will be sold should help raise billions of pounds in cash. That could help pay down some debt.
My fifth choice would not be an individual share but an investment trust. Specifically, I would go for the City of London Investment Trust.
It would give me exposure to dozens of different UK companies. That could be good or bad, depending on how the British economy performs. After over half a century of annual dividend increases, City of London currently yields 5.2%.
Earning passive income from my ISA
Investing the £20,000 like that, my average yield would be 8.6%. That ought to earn me around £1,700 in dividends next year alone.
As a long-term investor though, I would likely hold those companies in my Stocks and Shares ISA for years to come (indeed, I already own four of the five).
Investing money today could mean I earn sizeable dividend income for a long time, without touching my capital.
