One common way to use a Stocks and Shares ISA is to stuff it full of dividend shares as a way to try and build passive income streams.

An ISA can be a good platform for accumulating dividends and reinvesting them, as the dividends inside are not taxed. So how can an investor help themselves when it comes to using a Stocks and Shares ISA in this way?

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Making the most of your allowance

Every investor has an annual contribution allowance for their Stocks and Shares ISA. How much of that allowance they utilise is up to them. Not everyone is in a position financially to make full use of their allowance in any given tax year.

As a general principle though, it makes sense to try and make the most of the Stocks and Shares ISA opportunity that works financially.

An ISA can be perfect for compounding

Dividends that are earned within the Stocks and Shares ISA and reinvested in it do not count against that annual contribution allowance.

That means that the vehicle can be ideal for someone who is looking to compound their dividends in a tax-efficient way.

Don’t ignore the ISA wrapper itself!

3%, 4%, 5%, 6% and more….

It can be easy to zoom in on the yields of dividend shares and think about other factors less.

But while dividends may sit in the credit column of your ISA account, there are also regular items in the debit column, whether they be management fees, stockbroking commissions, or other charges.

So to avoid earning dividends with one hand and then giving them away with the other to a platform provider, it makes sense to compare the options when choosing a Stocks and Shares ISA.

Look at dividend quality and sustainability

Paying too much attention to yields alone risks another problem. The yield can turn out to be illusory. No dividend is ever guaranteed to last.

That explains why it is good practice to keep a Stocks and Shares ISA (or any portfolio, come to that) diversified across a few different shares.

It is also important to look at a company’s business prospects and finances when taking a view on what may happen to the dividend in future.

One income share I’m excited about

I did that recently when adding Dunelm (LSE: DNLM) back into my portfolio. The Dunelm share price has moved up a bit since I bought, but it is still 21% cheaper than a year ago.

Part of that fall reflects the company warning that it had a weaker start to its current financial year than hoped for. It pinned that on the hot summer, but there is a risk it may not be a temporary blip. A weak housing market could dampen demand for homewares.

Still, the chain has a proven, profitable business model. Plans to streamline its range could help boost profitability further. It is also emphasising its own branded products, helping differentiate it from rivals.

Dunelm yields 5.2% — and often pays out special dividends on top of that when it has cash to spare. I see it as a share for investors to consider.  

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Christopher Ruane owns shares in Dunelm.