Here’s how I’d invest my first £1k in high-yield stocks

Jon Smith breaks down what makes a high-yield stock a viable investment and outlines some specific examples he could buy right now.

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.

Smartly dressed middle-aged black gentleman working at his desk

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.

High-yield stocks have always been in fashion. However, given the surge in inflation as we’ve come out of the pandemic, more and more investors are searching for higher-yielding options. If I had £1k that I wanted to put to work right now purely focused on this area, here’s what I’d do.

Filtering down from the top

There’s no industry standard parameter that sets apart a dividend share as high yield. Yet in order for me to pick stocks, I need to apply some filters. I believe a logical place to start is filtering out stocks that have a yield below the current rate of inflation. From the latest reading this week, that eliminates income shares below 6.8%.

I’m also going to cut off any stock that yields above 10%. This might sound odd, but it relates to the sustainability of the dividends. Sure, I want to squeeze the most out of the lemon. But what’s the point in purchasing a stock with a crazy 15% yield only for it to be cut at the end of the year? That doesn’t make sense.

Should you invest £1,000 in Safestyle Uk Plc 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 Safestyle Uk Plc made the list?

See the 6 stocks

So my pool of options consists of shares in the 6.8-10% bucket. Given the FTSE 100 average dividend yield is 3.84%, these are comfortably high-yield plays.

When I consider both the FTSE 100 and the FTSE 250, there are 41 shares to choose from.

Delving deeper to diversify

Next I’d break that number down into even smaller categories. I’d split the ideas up into sectors and geographies. This is aiming to diversify my portfolio so that I’m not overly exposed to one particular area of the stock market.

If I was and the sector had a terrible year, I could find my dividend income significantly reduced.

With the £1k, I’d aim to have 10 stocks each with £100 invested. I’d want a maximum of two from any sector, ideally with worldwide sales.

Specific examples I like

One sector I’d include is financial services. Higher interest rates have boosted the profit margins for banks. Yet it has also helped asset managers as investors look to use them to try and generate returns.

With the recent share price tumble, I’d use it as an opportunity to buy Abrdn shares. The current dividend yield is 8.39%. Even though assets under management has fallen this year, I think the worst of its transformation is over. When looking out for years to come, I feel the company could do well.

From the FTSE 250, I’d buy the Sequoia Economic Infrastructure Fund, with a yield of 8.33%. The stock has a strong history of paying out quarterly dividends. The price is trading at a 13% discount to the net asset value of the investments within the fund. Therefore, in the long run, this should correct, meaning the share price should rise.

If I had the £1k right now, I’d buy the two above stocks and replicate my thinking across other sectors to build up a good high-yield portfolio.

But here’s another bargain investment that looks absurdly dirt-cheap:

Like buying £1 for 31p

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.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Dividend Shares

Investing Articles

Cheap UK dividend shares to consider buying right now

We're only just past the first quarter of 2025, but it already looks like the year could be another good…

Read more »

Investing Articles

1 beaten down dividend stock investors could consider for passive income

Our writer Ken Hall takes a look at one under-pressure mining giant that should be on investors' radars as a…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Investors considering Legal & General shares could aim for £10,075 a year in passive income from a £5,500 stake!

Legal & General shares deliver one of the highest yields of any major FTSE-listed firm, so investing now could generate…

Read more »

Investing Articles

Here’s how to produce a £1,400 second income from a £20k ISA in the next year

Harvey Jones says it's possible to generate a second income of £1,400 from this year's Stocks and Shares ISA. It…

Read more »

Bronze bull and bear figurines
Dividend Shares

2 dividend shares that could provide some shelter from the market storm

Jon Smith points out a couple of dividend shares that have yields in excess of 5% -- and that have…

Read more »

Investing Articles

I’ve been snapping up shares in this 11.6% yielding FTSE 250 growth stock

As a trade war knocks a quarter of the value off this FTSE 250 asset manager in a few days,…

Read more »

Young female analyst working at her desk in the office
Dividend Shares

A 9.28% dividend yield? Here’s the forecast for HSBC in 2025 and beyond

Mark Hartley considers the long-term prospects of the UK's largest bank, examining the reasons behind its surging dividend yield and…

Read more »

Investing Articles

11% yield! Could this UK stock  be a huge opportunity for investors targeting a second income?

An double-digit dividend yield could be second-income buying opportunity if the stock market is underestimating this UK translation company. 

Read more »