How I’d invest a Stocks & Shares ISA today for dividend income in the future

One of the things I like about using a Stocks and Shares ISA is that it can be a suitable vehicle for long-term investing. Putting money into my ISA today and then leaving it there for years matches the patient approach I take to buying and holding shares.

That long timeframe lets me invest strategically, for example, by building a portfolio today based on what I think its future dividend income could be. Here is how I would go about that.

Future focus

Why would I think about what dividends might be in future rather than just look at what they are now?
I see a couple of reasons to take this approach. First, just looking at today’s dividends could lead me to make some investing mistakes. For example, I might buy shares that have a high dividend yield right now, but lack a resilient business model. That could mean that in future, profits fall and the dividend is cut. In fact that is one of the concerns I have about tobacco shares I own like Imperial Brands. If cigarette sales keep falling, will the company be able to maintain its dividends?

Another reason to think about dividends in the future not just today is that it can help me identify some shares for my ISA I otherwise might miss. An example of that is Judges Scientific. At the moment, the scientific instrument maker’s yield of under 1% would not be enough to get my attention.

But what might it be in, say, a decade’s time? Nobody knows. But the company has been consistently raising its annual dividend by double digits in percentage terms. Judges’ focussed business model in an area with attractive profit margins could help it do well in future. By looking around for potential sources of dividend income far in the future, a company like Judges comes more clearly onto my radar.

Estimating future dividends

But in practical terms, how can I spot companies I think may have strong dividends years from now, whether or not they do currently?

It basically boils down to free cash flow. That is what enables a business to pay out dividends. So if a company looks like it could generate substantial free cash flow in future, it could turn out to be a promising income pick for my Stocks and Shares ISA.

So I look for companies operating in markets that I expect to have strong customer demand in future. I consider whether they have some unique competitive advantage that could help them make big profits. I also look at the balance sheet, to see whether a firm’s debts are manageable or could eat badly into free cash flow.

Positioning my Stocks and Shares ISA for the long term

This approach to future passive income streams matches my overall investing philosophy.

It focuses on the long term. Rather than doing that just by looking at a share’s history, I try to understand the financial fundamentals of a business, then consider what that might mean for it in future. That way, hopefully I can identify great future opportunities selling at an attractive price today.