Owning dividend shares is a time-tested way to build passive income streams. I do that using a Stocks and Shares ISA. By regularly drip-feeding money into it, I hope to build sizeable up a sizeable passive income over time.
As an example, if I wanted to target £1,000 each month on average in income (£12,000 per year), here is how I would go about it by putting aside £300 on a monthly basis.
My first move would be to get into a regular saving habit. That way, hopefully I would stick with it even when other other spending needs popped up.
Each person has their own individual financial circumstances. I think the important thing is to set a saving target that seems realistic given my specific situation.
I would put the money into a Stocks and Shares ISA from day one. That way, once I had saved enough money and knew what I wanted to invest in, I would be ready to act immediately.
Finding shares to buy
Investing is something I see as a long-term pursuit. So my plan to generate a four-figure monthly passive income from dividend shares would play out over decades not months.
That means that when buying shares, I will not be chasing the latest hot fad. Instead, I would hunt to find businesses I think have the foundations of profitability that could last for decades.
So I would look for companies in areas with large, resilient customer demand that have some competitive advantage. For example, the brands of Unilever, network of National Grid, and technology patents of Apple are all competitive advantages I think no rival could directly match.
I also look at a company’s balance sheet. If it is debt-heavy, that may reduce the prospect of dividends even if the business is profitable. After all, dividends are never guaranteed at any company.
Aiming for a target passive income
Another consideration is share price. That matters partly because the yield I earn on a share varies according to what I pay for it.
How much I need to invest to try and hit the £1,000 monthly target depends on the average yield of my portfolio. If that is 5%, for example, I would need £240,000 worth of investments in my Stocks and Shares ISA.
Reaching that by saving £300 each month would take 67 years. I could cut that time by more than half if I reinvest the dividends, something known as compounding. If I do that and continue to average a 5% yield, I could be earning £1,000 per month in dividends three decades from now.
On top of that, I would have a sizeable portfolio in my Stocks and Shares ISA. Depending on my choices, that could provide me with passive income for the rest of my life.