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Ever thought of stuffing a Stocks and Shares ISA with dividend shares as a way to earn passive income?
Lots of people do.
Such an approach can be lucrative over the long term.
It also means that passive income can hopefully be earned from proven blue-chip companies. That sounds genuinely passive to me, compared to some other approaches people use.
Setting a goal and working towards it
How much might such a plan earn?
It is a bit like asking how long is a piece of string. The amount of passive income a Stocks and Shares ISA can generate in the form of dividends depends on three factors: how much is invested, for how long, and at what dividend yield.
£1k a month equates to £12k per year. At a 5% yield, that would require an investment of £240k. At a 7% yield, it would require a bit less than £172k.
That may make it sound as if higher yields are the thing to go for. But no dividend is ever guaranteed to last, so when looking for shares to buy, it is always important to look at the likely source of any future dividends, not just the current yield.
£1k a month is a realistic target, like this
Both 5% and 7% are above the current FTSE 100 yield. But I think 7% is a realistic target in today’s market.
Not everyone has a spare £172k in their Stocks and Shares ISA that would let them get going straight away. That is fine – it is also possible to start from zero, by making regular contributions.
Putting £20k a year into the ISA and compounding at 7% annually, it would take just 7 years to hit the target size of close to £172k.
It could also be done with smaller contributions, though it would then take longer.
Finding shares to buy
One share I think investors should consider is Legal & General (LSE: LGEN). The FTSE 100 financial services firm has an 8.9% dividend yield.
It also aims to grow its dividend per share each year. The sale of a large US business ought to generate cash to help do that, though I see a risk that it could also leave a gap in the company’s profit generation ability compared to previously.
But with its strong brand, long history, large customer base, and proven cash generation ability, I think there is a lot to like about Legal & General.
Over the long term, I am hopeful it can use those strengths to keep generating more cash than it needs to run its business – and hopefully distributing lots of it as dividends.
Getting started
Choosing a diversified mixture of high-quality shares is one step on this passive income journey. But before even doing that someone needs a practical means. So choosing the right Stocks and Shares ISA for their personal needs is important.
After that, they can start to scour the market for dividend shares with strong long-term potential.