My Stocks and Shares ISA goal is to aim to build up a passive income pot over the long term. And with so many great dividends on the FTSE 100 right now, I think I have a chance of doing well.
Not just dividends
But that reminds me of the first mistake I want to avoid in 2025. I want to make sure I don’t focus solely on dividend stocks.
Suppose I’d bought some Nvidia stock five years ago. It offers a forecast dividend yield of a paltry 0.03%. And that wouldn’t buy me much of life’s essentials.
But I didn’t want to take any income over that time, so I’d have reinvested any dividends anyway. And the value of my Nvidia investment would have soared by more than 2,000% today.
So if I wanted income now, I could sell Nividia and buy a FTSE 100 dividend stock. And I could bag a much bigger annual income than had I started out with only dividend stocks.
Beware the biggest
While building up that passive income pot, it’s total returns that matter, not the biggest dividends. That’s why I’ve always avoided some of the stocks with the biggest yields, like Vodafone (LSE: VOD).
The mobile phone giant was famous for paying huge yields, without really bringing in enough in earnings. The yield reached 10% and more, which might sound great for passive income investors.
But over the past 10 years, Vodafone shares have lost 70% of their value. In terms of total returns, that’s not a great overall performance. And other stocks with lower yields but better share price performances could have built up to higher potential passive income.
Vodafone has slashed its dividend for 2025, so that’s an income blow too. Still, it does give us a chance to re-evaluate for the future.
Stay covered
The Vodafone dividend for the past few years has not been covered by earnings. And that can be a clue that it might not be maintained in the long term.
If I look at some of the biggest FTSE 100 yields today, I see Phoenix Group on a 10.6% yield, and M&G at 10.2%. But forecasts show little or no cover by earnings in the next few years.
The nature of the insurance and investing businesses means the dividend sustainability can be more complicated than that. I do actually like both these companies, and I think they could both be good passive income investments.
But it does give me cause for caution. And on balance, I think I prefer the 7.3% forecast dividend yield from my Aviva shares. The City reckons that should be well enough covered by earnings.
Keep investing
And, even with these three specifics covered, there’s one more mistake to avoid. And that would be to not use as much of my 2025 Stocks and Shares ISA allowance as I can.
This post was originally published on Motley Fool
