The idea of generating a 7% dividend yield from my Stocks and Shares ISA is appealing to me for the boost it could give to my passive income streams. If I had £20,000 in an ISA and wanted to aim for that target – and the £1,400 in annual dividends it could generate – here is how I would go about it.
First things first
Although I have a target yield in mind here, I never start my hunt for shares by looking at yields. Instead, I search for what I see as great companies trading at an attractive price. Only if I find some that I would think about buying do I then consider their yields.
So although I am narrowing down my search here to firms that can provide an average 7% yield, the tail is not wagging the dog. My focus is on finding the right companies in which to invest. If they are not of high enough quality, or too expensive, I will not buy them for my Stocks and Shares ISA, regardless of any yield.
Going for an average
One important risk management principle I use when investing is diversification. With £20,000 to invest, I would have ample funds to do that. For example, I might put £2,000 into each of ten shares.
That also means that I can hit an average yield of 7% even if not all of my shares have that yield. By buying some that have a lower dividend yield but balancing them with higher payers, I should still be able to hit my target.
What sort of shares could yield 7%?
The average dividend yield of 7% might sound quite high. After all, some FTSE 100 shares do not pay dividends at all while other popular dividend payers such as Diageo and Shell yield less than 4%.
But I think it is possible to identify shares that pay the sorts of yields that could help me hit my target, even among the blue-chip shares of the FTSE 100. Several sectors are promising places to start.
For example, British American Tobacco yields 6.4%, while rival Imperial Brands offers 6.8%.
Among financial services providers, M&G yields 9.6% and insurer Phoenix offers 8.3%. High yielders from other sectors I would consider for my Stocks and Shares ISA include Vodafone with its 8.4% yield and Persimmon.
Housebuilder Persimmon has an 18% yield at the moment, though it has signalled that a dividend cut is on the way. Even after such a cut, it may have a yield at or above 7%. But the proposed cut is a good reminder of the value of diversification – and why I focus first on finding the right companies, not merely chasing the highest yield. A high yield can signify investor concerns about elevated risks.
Investing my ISA
A lot of these companies are in mature industries, so it would limit my hopes for future growth.
Yet from an income perspective, I see some strong contenders currently selling for attractive prices. With £20,000, I believe I could invest my Stocks and Shares ISA in blue-chip shares yielding an average 7%.
The post Here’s how I’d invest my £20,000 Stocks and Shares ISA for a 7% dividend yield appeared first on The Motley Fool UK.
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C Ruane has positions in British American Tobacco P.l.c. and M&g Plc. The Motley Fool UK has recommended British American Tobacco P.l.c., Diageo Plc, Imperial Brands Plc, and Vodafone Group Public. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.