One way to earn regular income without working for it is to drip-feed money into a Stocks and Shares ISA. Then it can be invested in shares that pay dividends before sitting back year after year and hopefully watching those dividends increase. That just leaves owning a share portfolio that hopefully grows in value.
Why an ISA can be a good way to earn income
For some investors, a Stocks and Shares ISA is a retirement fund or rainy day money. They put money in and buy shares, without expecting to take money out any time soon.
But an ISA can also be an income generator in the short and medium terms, even for a long-term investor.
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There can be a tax advantage to buying income shares in an ISA and receiving dividends. Personally, I also think there is a mental discipline that comes from putting money into an ISA. I could take it out, but once it is in the ISA I would think twice about doing so, as once I reach my year’s ISA contribution limit that is that.
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.
Jam today or more jam tomorrow
If I put £80 each week into a Stocks and Shares ISA, that would give me over £4,000 a year to spend on passive income-producing dividend shares.
Year after year I could keep growing the cash pile. So in the first year, with £4,160 to invest, if my average dividend yield was 5% I could earn £208 in income. Another year’s contributions could see me earning double that and, after three years, I already ought to be earning over £600 annually. The more years I stick to it, the bigger the potential.
An alternative would be to compound the dividends. That would mean I sacrifice receiving the income in cash now, in the hope of earning even more in future as my dividends themselves start to earn dividends.
If I invest £80 a week without compounding, after a decade my 5%-yielding portfolio ought to earn me £2,080 in income annually. Compounding at 5%, after the same 10-year period I ought to earn £2,676 annually in income.
Finding quality high-yield shares
I could earn even more if the average dividend yield on my Stocks and Shares ISA was higher than 5%. But hunting for yield without first looking at quality and value can be a costly recipe for failure. So I start by looking for a share I think has strong income prospects and trades at an attractive price.
As an example, consider Phoenix (LSE: PHNX), a share investors should consider buying for its dividend prospects. With a yield of over 9%, it is one of the most lucrative FTSE 100 dividend payers.
The company owns a number of insurance brands and has a customer base in the millions. That is an industry I think is here to stay and Phoenix’s brands and customer base help give it competitive advantages. It aims to grow the dividend per share annually and has been able to do that over the past few years.
Dividends are never guaranteed and one risk I see is a property market downturn meaning Phoenix needs to write down some assets. Still, on balance, I think its income outlook remains strong.
