Money, money, money! ABBA has done a good job of generating ongoing earnings from its back catalogue, and I aim to do something similar when it comes to investing my Stocks and Shares ISA.
If I had a spare £20k in my ISA to invest today and wanted to target annual dividend income of £1,600, here is how I would go about it.
Why now?
The past several years have seen quite a few blue-chip FTSE 100 companies offer very juicy dividend yields.
Sometimes, an 8%, 9%, or even 10% yield might be available only to investors willing to take a chance on small, or highly volatile companies. But at the moment, quite a few established businesses in the big league have yields like that.
High yields can sometimes indicate elevated risk. Dividends are never guaranteed and even companies like Shell have suddenly cut their payout in recent years.
Still, I do think the sorts of yields available in today’s market make it an ideal moment for me to try and boost my passive income streams by buying dividend payers for my Stocks and Shares ISA.
Constructing the portfolio
To hit my target, I would need to earn an average dividend yield of 8%. That is only an average, so I could still manage if some businesses paid me less as long as I earned 8% overall.
I would diversify my Stocks and Shares ISA across five to 10 firms to reduce my risk if any one company turned out to disappoint.
Among financial services firms, I would invest in M&G (yielding 10.3%), Legal & General (9%), Aviva (8.5%) and Phoenix (9.7%). A telecoms company on my list would be Vodafone (10.6%). And 8.8% yielder British American Tobacco would also be on my shopping list.
I would also look outside the FTSE 100 to avoid my portfolio being too heavily weighted in financial services shares. After all, four of my six FTSE 100 picks above are in that sector.
So I would cast my eye over shares in smaller companies, as well as investment trusts such as Income & Growth, with its 11.3% yield.
Embarrassment of riches
With so many high-yielding shares on offer at the moment, I feel comfortable I could hit my 8% yield target while keeping my portfolio sufficiently diversified.
One trap I would seek to avoid however, is being swayed by yield alone. Even if a company has a high yield today, if its business is weak, the dividend could be cut tomorrow (or at any moment). That is a risk for all of the companies I discussed above — and indeed any dividend share.
So my priority in investing my Stocks and Shares ISA would be into quality businesses I think have a strong future, as well as an attractive share price.
Luckily, I think today’s market offers me ample opportunities to do that.
