Image source: Getty Images
One way to try and build up passive income streams is to set up a Stocks and Shares ISA, put some money in it and buy dividend shares.
Is it that simple? Let me answer by going through those each of those steps in turn.
Setting up an ISA
The first step is certainly easy enough: opening a Stocks and Shares ISA.
But while it can be easy, there are still things to consider.
Different ISA providers have their own tables of fees, commissions and other charges. That matters because paying them can eat into the passive income streams generated from owning dividend shares.
So I think it is sensible for the income seeker to compare different options carefully when choosing a Stocks and Shares ISA.
How much money is needed?
The next step I mentioned above is putting money into the ISA, to fund dividend share purchases.
How much is the right amount?
That depends on what your passive income target is – and what you can afford.
The dividend yield on the ISA and the amount invested predict the annual income (I say ‘predict’ because future dividends are never guaranteed).
For example, imagine someone wants to target £1,800 of passive income per month. That is £21,600 per year. At a 5% dividend yield, that would require an ISA worth £432k.
That is a lot, especially given that the standard annual ISA contribution allowance is £20k.
But the plan could be altered to fit a larger or smaller budget, with correspondingly different passive income streams as a result.
Also, someone could built an empty ISA up to one worth £432k by reinvesting dividends (known as compounding) over time rather than taking them out as cash.
Doing that by contributing £20k annually and compounding at 5% each year would take 16 years.
Finding shares to buy
In my example I presume a 5% yield. That is well above the current FTSE 100 yield of 3.1% but I see it as realistic in today’s market.
Of course, as dividends are never guaranteed, it is important to spread risks by diversifying the ISA across different shares.
I am a believer in long-term investing. From a long-term perspective I think one share worth considering for its passive income prospects is flooring manufacturer and distributor James Halstead (LSE: JHD).
Its 6.9% yield is well above the 5% target I mentioned above.
The company’s proven business model and cash generation capabilities have helped it raise its full-year dividend annually for the past 49 years. This year saw the interim dividend increased by 4%.
The share price performance has been less impressive, more than halving over the past five years.
I see this as making the current share price more attractive for a patient investor.
But patience may be required because, as the share price fall suggests, some risks are weighing on investor sentiment.
Revenue and operating profit in the first half both showed year-on-year declines. Slowing sales in the UK commercial flooring market remain a threat to both revenues and profits.
But while the UK is James Halstead’s largest market, it accounts for less than half of total sales. The company has an extensive product offering and well-developed customer base.
From a long-term perspective, I believe it has strong potential to keep paying sizeable dividends.
What income stock do we like better than James Halstead Plc right now?
One of our Share Advisor analysts has just released a brand new stock report that we think is a must-read for any investor looking to try and generate potential income.
And the best bit is that you can see if for yourself, right now, absolutely free of charge!
No jargon. No hard sell. Just a clear look at an income share we think is worth your time.
Christopher Ruane owns shares in James Halstead.
This story originally appeared on Motley Fool
