Here’s how I’d invest £20,000 in a Stocks and Shares ISA for dividend income in 2023

With a generous tax-free allowance on offer, here’s how our writer would use a Stocks and Shares ISA to build his passive income portfolio.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Cheerful mature couple sitting and managing expenses at home.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I’m looking for new passive income ideas this year. With a £20,000 annual allowance to take advantage of, I think buying high-yielding dividend stocks within a Stocks and Shares ISA could be a great way to earn a second income.

Currently, the tax-free dividend allowance is £2,000. However, this will be halved to £1,000 for 2023/24 and reduced further to just £500 from 2024/25.

Optimising my portfolio to maximise my returns has never been more important in the context of UK tax changes. So, here’s how I’d use my £20k allowance.

Should you invest £1,000 in Centrica right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Centrica made the list?

See the 6 stocks

My dividend income target

I like to be ambitious but realistic when setting investing targets.

The FTSE 100 index currently yields 3.55%. I reckon I can beat the index by carefully selecting high-yield UK dividend shares. With £20,000 to invest, I’d aim for £1,000 in annual passive income. That means I’d need a 5% yield from my portfolio.

I’d buy a range of dividend stocks in my ISA so my portfolio is diversified across different companies and sectors. If any single holding cut or suspended its dividends, I could hopefully rely on my other positions to continue providing regular passive income streams.

Here are a couple of examples I’m considering.

A FTSE 100 dividend stock

Among FTSE 100 stocks, National Grid (LSE:NG.) shares could be a good fit for my portfolio given its 5% dividend yield.

Created with Highcharts 11.4.3National Grid Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

National Grid is a dividend aristocrat, boasting a 25-year history of dividend hikes. Utilities giants are traditionally some of the most reliable dividend stocks. I believe National Grid is no exception.

The latest financial results for half-year 2022 were promising. Underlying earnings per share increased 42% to 32.4p. In addition, the dividend grew by 3.7% to hit 17.84p.

Granted, the stock isn’t without risks. The company is undertaking an expensive capital investment programme to decarbonise the UK’s energy network. This could reduce the money available for dividends and possibly weigh on the National Grid share price.

Nonetheless, I like the solid dividend history and strong financials. If I had some spare cash, I’d invest today.

A FTSE 250 dividend stock

Turning to the FTSE 250, clay brick and construction materials manufacturer Ibstock (LSE:IBST) also offers a 5% yield.

Created with Highcharts 11.4.3Ibstock Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

The UK’s housing crisis is well-documented and much ink has been spilled on the need to build more homes. As the UK’s leading brickmaker, the company should benefit from this acute demand.

In a recent trading update the business confirmed it expects a 25% revenue increase to £510m for 2022, with adjusted EBITDA ahead of previous expectations.

Ibstock faces headwinds too from a cooling housing market as well as increased raw material and labour costs due to inflationary pressures.

However, despite the risks, I like the long-term outlook for the Ibstock share price. With some spare cash, I’d buy today.

Using a Stocks and Shares ISA

With future tax changes on my mind, I’m striving to use as much as I can of my £20k ISA allowance this year.

To maximise my passive income, I’d reinvest my dividends to benefit from a compounding effect over the long term. With a clear savings plan and disciplined investing strategy, I think I could hit my £1,000 annual dividend income target.

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.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Charlie Carman has no position in any of the shares mentioned. The Motley Fool UK has recommended Ibstock Plc. 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.

Pound coins for sale — 51 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

More on Investing Articles

Tesla building with tesla logo and two teslas in front
Investing Articles

Tesla stock is down. But it may be far from out!

Tesla stock has crashed this year but its long-term record of value creation is outstanding. So, could this be a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

£3k in savings? That’s plenty to start buying shares and earning passive income!

Christopher Ruane explores how a stock market newcomer could start buying shares with a few thousand pounds and an appetite…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

5 passive income techniques of stock market millionaires

Christopher Ruane details a handful of approaches many successful stock market investors use to grow their passive income streams.

Read more »

Aston Martin DBX - rear pic of trunk
Investing Articles

Down 42% in a year, here’s why Aston Martin shares could keep falling

Aston Martin shares have destroyed vast amounts of shareholder value since the company listed in 2018. Are they now a…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

FTSE shares: a once in a blue moon chance to get rich?

Christopher Ruane explains why he thinks hunting for blue-chip FTSE bargains in the current market could help an investor build…

Read more »

Businessman hand stacking money coins with virtual percentage icons
Investing Articles

4 stocks Fools have bought for growth and dividends

Sometimes, an investor doesn’t have to make the choice between buying a growth stock or dividend shares! Some investments offer…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

Is there no limit to how high Rolls-Royce shares might go?

Christopher Ruane sees some reasons Rolls-Royce shares could continue pushing upwards. But is he persuaded enough about the potential value…

Read more »

Businessman hand flipping wooden block cube from 2024 to 2025 on coins
Investing Articles

How much could £20k in a Stocks and Shares ISA be worth in 2030?

UK investors have enjoyed spectacular returns in their Stocks and Shares ISA's over the past five years. Would could the…

Read more »