With the annual contribution deadline for a Stocks and Shares ISA falling today (5 April), my mind has turned to how I use my ISA. One of the ways I use it is as a tax-free wrapper to pile up passive income in the form of dividends from blue-chip shares.
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That means I can earn money without working for it, thanks to the commercial success of large, proven businesses.
Such an approach can be lucrative.
Here is an example of how an investor could use a £20,000 ISA to target £1,580 of passive income next year – and again in 2026 and again in 2027 and indeed year after year for decades!
Dividend shares can be highly lucrative
The reason for that ongoing income potential is that once an investor owns a share, they receive any dividends it pays until they sell it. So, a share bought today could be generating passive income for decades to come.
Such payouts are never guaranteed. So a savvy investor will spread their ISA over a range of different shares. Our hypothetical £20,000 is ample to do that, for example by buying into five to 10 different companies.
It is also important to choose carefully what shares to buy. Just looking at past performance can be misleading — sometimes highly so. Instead, an investor ought to consider what they think the future prospects of a business looks like and how that compares to the current share valuation.
Targetting almost £1,600 per year
I mentioned above a potential target of £1,580 in passive income annually from a £20,000 ISA.
That implies a dividend yield of 7.9%.
Such a yield is fairly high: the average yield of the flagship FTSE 100 index of leading shares currently sits at 3.4%, for example.
But in today’s market, I think such a yield is possible. One share for investors to consider is financial services firm Legal & General (LSE: LGEN). It offers a 9% yield.
It also has a policy of annual dividend growth and has delivered on that in recent years.
Can it keep doing so?
The business does have a strong brand, large customer base, and resilient demand thanks to its focus on the retirement-linked market.
But I see risks too. Choppy stock markets could lead to policy holders pulling out funds, hurting profits. It is not a coincidence that the company’s last dividend cut followed the 2008 economic crisis.
From a long-term perspective, though, I see Legal & General as offering strong passive income potential.
Choosing the right ISA matters
Of course earning passive income is not just about earning dividends: it also involves not handing over too much of those earnings in the form of ISA fees and costs.
There are lots of Stocks and Shares ISAs available on the market.
Today seems like the perfect time for an investor to look at what they offer and decide what one suits their own needs best!
This post was originally published on Motley Fool
