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Have you ever wondered about the income potential of investing in a Stocks and Shares ISA full of dividend payers?
Many blue-chip companies with well-proven business models are generous dividend payers. That strikes me as an opportunity.
Thousands upon thousands of pounds of force
How much Stocks and Shares income an ISA can gain over time will depend on how much money is in it and what dividend yield it benefits.
The dividend yield is not a complicated concept. It basically means how much a person expects to earn in dividends each year, expressed as a percentage of how much the shares are worth.
Currently, for example, the FTSE 100 The index yields 2.9%. For that product, a £20k Stocks and Dividends ISA should earn £580 a year in dividends.
Over 20 years, that annual amount would add up to an income of £11,600.
To raise the level of income
But that FTSE 100 number is only an estimate.
Not all stocks pay dividends. Some companies are reducing or canceling their dividends.
That’s a risk to revenue streams – but it’s also an opportunity. Some companies increase their dividends over time.
By investing in companies that grow their returns over time, a Stocks and Shares ISA can generate more income year on year, without requiring additional investment.
Another way to increase income compared to my example above would be to achieve a higher yield. For example, at a 5% yield, an ISA would earn £1k a year in passive income. Over 20 years that would be £20k.
What about profit growth? It says that’s happening at a modest 3% per year, from an initial yield of 5%. That would mean that, over 20 years, a Dividends and Shares ISA would generate around £26,870 in income.
Choosing the right Stocks and Shares ISA
Another potential drag on returns can be fees, commissions, and fees charged by the stockbroker providing the ISA platform.
So it makes sense to compare the many other Stocks and Shares ISAs on the market, to see what else seems most attractive. Different investors have different needs.
One assignment I’m sticking to
At 4.9%, the yield is given by the distiller and the brewer Diageo (LSE: DGE) is close to the 5% I used in my example above.
Not only that, but the FTSE 100 company has grown its dividends annually for over three decades.
That was due to strong demand for alcoholic beverages, combined with Diageo’s portfolio of premium brands such as Guinness.
But consumers’ thirst for alcohol is declining in many markets. That puts sales prices and profits at risk.
That already eats into the search for the best white spirit. While Guinness continues to do well, the bigger picture globally is one of declining beer consumption.
If Diageo can successfully combat those challenges, it can continue to increase its dividend per share each year. But with the difficult environment of the beverage industry, that is not guaranteed.
However, I hold Diageo in my portfolio and have no plans to sell it.
