Opening a Stocks and Shares ISA is easily one of the best things I’ve done as an investor. In addition to shielding any profits from the taxman, I also get to hold on to all the dividends I receive.
Speaking of which, here’s how I’d invest my £20k allowance today if I were focused on developing a ‘strong and stable’ passive income stream.
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What I’m looking for
For me, great dividend stocks tend to share a few characteristics. The first is a history of cash being paid out consistently to its owners. Regular dividends suggest trading is sufficiently stable over time.
Another thing I look for is a company that’s really good at distributing more cash every year. This implies management is doing a great job of growing the business. If this wasn’t the case, those hikes wouldn’t last for long. You can’t pay out what you don’t have.
As an aside, it never ceases to amaze me that some of the most popular income shares among private investors actually have poor track records on this front. Think BP. Think Vodafone.
To be clear, I’m not looking for perfection here. There are many reasons why a great company may decide not to raise its payout in a single year. These include needing to invest in the actual business, reduce debt, or just general cautiousness.
However, the trend should definitely be upwards.
My £20k ISA allowance goes to…
To keep things simple, I’ll stick to the stocks in the FTSE 100 as a way of demonstrating that I don’t necessarily need to go searching for a needle in a haystack.
I’d definitely take a stake in defence firm BAE Systems. For fairly obvious reasons, the company’s order book is in rude health right now. Regardless of the Ukraine/Russia conflict, the company has been a knockout when it comes to delivering reliable and rising income.
I’d also buy up premium spirits seller Diageo. Like BAE, it has an enviable record of raising dividends, thanks to owning a bumper crop of high-quality brands that drinkers keep coming back to.
International distributor Bunzl and safety tech firm Halma also make the grade. Boring? Perhaps. But their multi-decade histories of throwing more and more cash back to owners are anything but.
For added diversification, I’d also buy a slice of financial services provider Legal & General. Despite operating in a cyclical sector, the FTSE 100 giant has been a remarkably solid income pick since the Great Financial Crisis.
Past performance DOES matter
It’s important to point out that the size of the dividend yields offered by those mentioned above vary wildly. Legal & General, for example, has a monster forecast yield of 9%. Halma’s yield is barely over 1%.
But size is not the goal here. In fact, this would be a risky strategy if I were dependent on a steady income. Seriously-high yields usually end up being cut.
No, the goal is to pick those companies that have proven themselves to be reliable cash machines for investors.
And while we’re continually (and rightly) reminded that past performance is no guarantee of future returns, I reckon it’s still the best gauge to use when it comes to selecting the best dividend stocks for my ISA.
