£1,600 annual dividend income from a £20,000 Stocks and Shares ISA? Here’s how

With the deadline for new contributions to the Stocks and Shares ISA one, I have been thinking about how I can take advantage of it.

One approach is to invest your ISA with the aim of generating substantial passive income in the form of dividends. For example, if I want to target £1,600 in passive income per year from a Stocks and Shares ISA with £20,000 in cash, here’s how.

Generate targets

Are these goals realistic?

I think. It will require me to get an average dividend yield of 8%. That’s high but not realistic in today’s market.

Some blue-chip FTSE 100 stocks currently have yields of 8% or more, including Barratt, Legal & General, M&G, Phoenix, Taylor Wimpey, and Vodafone. In addition, there are several investment trusts with 8%+ yields.

But just because a stock pays a certain dividend now doesn’t mean it will continue to do so. So, when it comes to investing in stocks and shares ISAs, I follow a few principles. I am diversified in different stocks. With £20,000, I could split the money evenly between five to 10 stocks.

I also focus on buying shares in brilliant businesses at what I consider to be an attractive price. It means I don’t just focus on results. I hunt for quality at the right price and only then consider saving dividends.

Find stocks to buy

What makes a great business?

First, I look for companies that operate in areas that are expected to continue to experience high customer demand. Then I consider whether there are some competitive advantages that can differentiate competitors in the field, such as patented technology or a strong brand. That helps give you strong pricing power and can help you make a profit.

I look for attractive share prices, even though my investment objective is dividend income not share price appreciation. After all, even as a long-term investor, I still want to sell the stock at some point in the future. If I have made a lot of dividends from them but ended up selling the shares at a huge loss, the lifetime value of the shares and the Shares ISA may have declined overall.

At this point I also consider the dividend yield. If I want to target £1,600 in annual income and the stock returns are not high enough to help me do that, I may decide not to buy them for my income portfolio. If the stock price declines in the future, the potential yield could rise to the level I found.

Using my ISA allowance

Putting £20,000 into a Stocks and Shares ISA will use up your annual allowance. Once the money is in the ISA, I don’t have to invest it immediately or even soon.

However, I can and will take the time to pick the kind of high quality income stocks that I hope will produce big dividends for years or decades to come.