Putting £20,000 into a Stocks and Shares ISA, I think I could generate quite a substantial flow of dividends. Here is the approach I would take if I wanted to target an 8% dividend yield on my ISA.
Yield as an end not a beginning
Although my focus is on yield I would not start simply by looking for high-yield shares. They could be yield traps. These are shares that looks like they have a high yield based on historical data, but it may not last.
Yield traps can be costly for investors. Not only does the yield end up being less than expected, but a dividend cut can also lead to the share price falling.
Instead, I look for great businesses selling at an attractive price. By that I mean companies that have a competitive edge in a market I expect to see large and sustained customer demand. Only once I find such companies do I then consider the yield they may offer me.
Diversifying my Stocks and Shares ISA
As an investor I seek to reduce my risk by diversifying my portfolio across a range of companies and business areas.
Having £20,000 in a Stocks and Shares ISA would be ample to do that. For example, I could invest £2,000 into each of 10 companies.
Note that I do not diversify just across companies, but also business sectors. Some sectors have very juicy yields right now. For example, in the tobacco industry I own British American Tobacco, which is yielding 6.6%, Imperial Brands, yielding 6.9%, and Altria at 8.0%.
Similarly, financial services offers a range of high yielders, like 10.1%-yielding M&G and Jupiter at 13.3%. I have invested in both.
But just investing in one sector also brings a concentration risk. Tobacco regulations could hurt demand across all manufacturers, for example, while a recession could heighten risks for all financial services companies. So I would make sure to spread my Stocks and Shares ISA across different industries, not only different companies in one sector.
Aiming for an 8% target
If my target is 8%, I do not need to invest only in shares with that yield. As long as my average is 8%, it is fine if some shares offer me less.
Take the five shares I mentioned above as an example. Two of them yield under 7%. But the average of the five is nearly 9%.
On that basis, I do think an 8% target is realistic in today’s market. I am alert to the risks sometimes suggested by high yields. Jupiter, for example, will introduce a new dividend policy in 2023 that means its dividend yield looks unlikely to be sustained.
But if I do my homework, focus on finding great businesses at attractive prices, and manage my risks appropriately, I think I could generate an 8% dividend yield each year from my Stocks and Shares ISA.
