A Stocks and Shares ISA might not be the most exciting sounding way to generate a passive income.
So what?
Passive income is about earning income without working for it. Investing a £20k ISA into proven dividend shares could achieve exactly that objective.
In fact, it could potentially set up a lifelong passive income stream.
£1 an hour, every hour, forever
To illustrate this, imagine that an investor wanted to earn an average of £1 per hour every hour.
That is £24 a day, or £8,766 per year (allowing for leap years).
Earning that in dividends from shares at a yield of, say, 6%, would require an ISA of around £146,100.
So, is it impossible to do, starting with a £20k ISA? Not at all, for an investor who is willing to take a long-term approach to passive income generation.
Investing £20k at a 6% compound annual growth rate for 35 years would mean the ISA was worth over £146,100. At that point, investing it in shares yielding an average 6% would mean that it was throwing off the equivalent of £1 or more in passive income per hour, every hour.
Buying the right shares
That could potentially go on forever.
In fact, the passive income could grow, if dividends were increased.
But the opposite is also true. After all, dividends are never guaranteed.
So it is important for an investor to make a smart choice when it comes to investing their ISA in the right portfolio of dividend shares.
A potential income star to consider
One share I think income investors should consider is Aviva (LSE: AV).
With a 6.7% yield, it is more lucrative than the 6% I used in my example (though any savvy investor will be spreading their ISA funds across diversified shares, not just one).
Aviva has also been growing its dividend per share handily over the past several years. I think its strong brand, large customer base, and proven business model could help it keep doing that.
On the other hand, it did cut the dividend substantially in 2020. Dividends are never guaranteed to last and, while Aviva’s planned takeover of rival Direct Line could boost earnings, I see a risk that the ever-present difficulties of integrating two different businesses could divert management attention and hurt profits.
Still, I reckon that if Aviva gets things right, it might not only maintain but actually keep growing its dividend.
Making the right choices
My example above presumed a 6% compound annual growth rate. With the right shares, an investor might do better and speed up the process of generating passive income.
But another factor in returns is paying close attention to the costs and fees of an ISA.
So, deciding which one seems right (given that every investor is different) seems like a smart place to start.
This post was originally published on Motley Fool
