£8,000 to invest in a Stocks and Shares ISA? Here’s how I’d target dividends of £100 per week!

Our writer explains how he could try to turn a Stocks and Shares ISA into a passive income machine over the long term, by investing £8,000 now.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Man putting his card into an ATM machine while his son sits in a stroller beside him.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

A Stocks and Shares ISA can be a vehicle for investing over the long term. That is true whether one’s focus is growth, income, or both.

Taking a long-term approach, I think putting £8,000 into an ISA now could help me target weekly dividend income of £100 on average.

Here’s how.

Should you invest £1,000 in British American Tobacco right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if British American Tobacco made the list?

See the 6 stocks

Building income streams

When targeting dividend income, the two variables that dictate what I might achieve are how much I invest and my average dividend yield.

Take my £8,000 example. If I had that much in a Stocks and Shares ISA earning an average yield of 5%, I ought to generate £400 in yearly dividends. At 8%, that would rise to £640.

£640 of passive income each year could certainly come in handy. Still, it is a long way from my target of £5,200. So, how might I aim for that even while earning an 8% yield on average?

Dividends on the dividends

In a word — compounding.

Basically, compounding involves reinvesting dividends rather than taking them as cash.

Over time, that could effectively mean I earn dividends on my dividends. This is the sort of snowball effect that billionaire investor Warren Buffett talks about.

Recall that I said above I would take a long-term approach to my Stocks and Shares ISA. If I compounded £8,000 at 8% annually, it would take me 28 years to build my portfolio to the point where I was earning £100 each week on average in dividends.

If I was impatient for the passive income, I could compound less (or none) of my dividends. That might give me cash in the short term, although I would need to adopt a much more modest target.

How to find brilliant shares to buy

In my example, I have used 8%. Is that realistic?

I think it is. I own a number of blue-chip shares currently offering a yield of 8% or more, including well-known names like Vodafone and M&G.

But I did not buy them purely because of the yield. Simply buying a share for its yield can be what is known as a value trap. Dividends are never guaranteed and a high yield can be a warning sign that some investors fear the payout may be cut.

Buying a high-yield share and then having that happen can be doubly disappointing. Not only is the dividend reduced (perhaps to nothing), but such a cut can also often lead to the share price falling.

So when deciding what to buy for my Stocks and Shares ISA, I always look to find brilliant businesses selling at an attractive valuation. Only then do I look at their yield.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has positions in M&g Plc and Vodafone Group Public. The Motley Fool UK has recommended M&g Plc and Vodafone Group Public. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

How much would an investor need in a Stocks and Shares ISA to generate £20k a year in passive income?

Edward Sheldon calculates how much one would need to generate a chunky annual passive income with dividend stocks. And it…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

The Diageo share price is down 32%. Is now the time to buy the dip?

A collapsing Diageo share price has left investors in the FTSE 100 drinks stock reeling, but could the company's hangover…

Read more »

Growth Shares

Prudential: the FTSE 100 insurance stock making a huge comeback in 2025

This FTSE 100 insurance stock has risen nearly 40% since mid-January. Edward Sheldon thinks it’s just getting started and believes…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

A £10,000 investment in AstraZeneca shares last Christmas is now worth…

AstraZeneca shares have enjoyed moderate gains this year, helping to recover some of last year’s losses. But does it remain…

Read more »

Mature couple in a discussion while eating a meal in a restaurant.
Investing Articles

£100 daily passive income? With the right shares in a Stocks and Shares ISA, it’s possible!

Earning £100 in passive income every day is a goal worth aiming for -- and our writer has a plan…

Read more »

Investing Articles

9% income a year! Are these 3 FTSE dividend shares no-brainer buys to consider for an ISA?

Harvey Jones picks out 3 dividend shares that now pay the highest yields on the entire FTSE 100. Are they…

Read more »

Investing Articles

The HSBC share price is down 7% in a month and looks dirt cheap with a P/E of just 9!

Harvey Jones has been watching for a crack in the HSBC share price. He says current volatility may make it…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

With BP’s huge Iraq oil deal formally approved, will its share price soar?

Could BP’s share price be set to reverse its decline of the past year with a huge new oil deal…

Read more »