Here’s how to invest £20,000 in a Stocks and Shares ISA to target a 7%+ dividend yield!

Discover which companies pay a 7%+ dividend yield and what to consider before investing a considerable sum of money in a Stocks and Shares ISA.

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.

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A Stocks and Shares ISA is an excellent vehicle for building wealth and for generating passive income. So, here’s how I’d invest £20,000 within an ISA wrapper while targeting a yield in excess of 7%.

A dividend yield indicates the proportion of a company’s value that’s returned to shareholders each year. For example, if I owned £1,000 of a stock, and it paid a 5% dividend yield, I’d receive £50 every year. And if I were to do this within a Stocks and Shares ISA, the money I receive would be tax-free.

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.

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The benefits

Investors often like dividend-paying stocks because they typically offer several benefits. Firstly, the dividend can be taken as a passive income. It can also be reinvested, which generates a compounding effect.

Dividend-paying stocks can also be less volatile than non-dividend paying peers. And well-run companies typically increase their dividends annually.

And remember, the yield is always reflective of the price I pay for a stock. In 10 years time, a £1,000 investment in a 5%-yielding stock today could be worth £100 a year if the dividend payments double.

In fact, look at billionaire investor Warren Buffett’s first investment in Coca-Cola in 1988. After 35 years of dividend increases the yield on his original cost basis is nearly 57%.

10 juicy dividend stocks

So let’s start by highlighting some of the juiciest dividend stocks around the world right now.

StockDividend yield
Vodafone Group11.4%
Sociedad Quimica Y Minera De Chile11.2%
Phoenix Group9.9%
British American Tobacco9.8%
M&G8.4%
Crest Nicholson8.1%
Legal & General7.8%
Rio Tinto7.5%
Aviva7.3%
Imperial Brands7.3%

It’s not all about big payouts

Obviously, many dividend stocks are highly attractive investment opportunities. However, it’s important we don’t put all our eggs in one basket and reduce our pool of possible investments. A strong and diverse portfolio may include a handful of dividend stocks, a handful of growth-focused stocks, in addition to assets like ETFs and bonds.

Of course, if we’re aiming to earn a passive income from our investments, we may want to be more focused on dividend stocks. If so, we still need to favour diversification, looking at multiple dividend stocks in multiple sectors.

Remember the coverage ratio

There’s more to dividends than just its yield. We’ve got to know whether the dividend is sustainable. And one of the best ways to do that is to look at the dividend coverage ratio.

This tells us how many times a company can pay dividends from its net income. A ratio below two is typically considered less safe, but there are other factors that come into this.

Cash flow is one. Companies with stable cash flows can be in a better position to pay dividends than their peers where cash flows might be more sporadic.

Take insurance, where policyholders pay monthly premiums, versus pharma companies where drug development can take decades and only after regulatory approval will they earn an income.

The bottom line

While I should be wary of big yields, and putting all my eggs in one basket, by taking a strategic approach, I can achieve a dividend yield in excess of 7% annually.

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.

James Fox has positions in Crest Nicholson Plc, Legal & General Group Plc, and Phoenix Group Holdings. The Motley Fool UK has recommended British American Tobacco P.l.c., Imperial Brands Plc, M&g Plc, and Vodafone Group Public. 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.

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