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Got some spare cash but no ideas on how to spend it? Parking it in a Stocks and Shares ISA this week before the annual contribution deadline will allow you to use it later as you chose. Another option would be to try to build income streams, by using an ISA to buy dividend shares.
That is possible but there are pitfalls that can be avoided. Here are three things that can help you build strong income streams from your ISA
1. Choose the best ISA
It may sound obvious, but a good place to start is to get the most from your ISA provider, while keeping costs down.
Fees, commissions, and fees may sound small. But 0.3% here and 0.5% there, a flat commission of £50 here or a minimum of £15 there can start adding up soon. That can pay off in the long run.
So I think it makes sense to shop around when choosing the right Stocks and Shares ISA.
2. Focus on the quality of the dividend, not just its current yield
I like high yield as the next investor. When I invest I look at the yield of the share.
But, seriously, I’m not looking only in that.
I look at many other factors that help me judge what I think is a dividend level is something.
For example, how well is free cash flow covered? How does a company’s board of directors prioritize dividend payments among other capital allocation options? What might the balance sheet mean for future free cash flow? How sustainable does the company’s cash flow look?
These are all subjective decisions to some extent. But I still think they are important given how long the dividend may last and what may happen to it in the future.
3. Let dividends earn dividends
Another way to improve your income streams over time is to reinvest them, rather than cash them out.
That way, the shares themselves can start receiving dividends.
This is known as integration. It is a simple yet powerful tool when it comes to growing your income streams.
One income share to consider
Let me go back to what I said above about a company that can sustain its dividends.
British American cigars (LSE: BATS) has a lot of debt. Its target market for smokers is shrinking, while regulatory burdens continue to threaten sales.
That makes it sound like it would be difficult for that one FTSE 100 the owner of the products including Pall Mall to maintain its profits over time, let alone grow it every year as it has been doing for decades.
But the company has strong pricing power, thanks to nicotine addiction and its premium product portfolio.
Demand for cigarettes has declined for years in many markets, yet the company is still making a lot of money. It also expanded its smoke-free business.
Not everyone wants to be involved with tobacco companies, given the ethical questions involved. But for those that do, I think British American Tobacco is worth considering given its revenue potential.
