A number of blue-chip UK shares have rather juicy yields right now.
As an investor, I like to keep my portfolio diversified. But I think for a £20K Stocks and Shares ISA, spreading the money across a handful of carefully researched and chosen blue-chip shares could give me the diversification I want.
Here are the five shares I would choose.
Should you invest £1,000 in British American Tobacco right now?
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British American Tobacco
My first choice would be a long-term high-yielder: British American Tobacco (LSE: BATS).
Why is the share high-yielding (9.9%, to be specific)?
The answer is a combination of decades of annual dividend rises, combined with a falling share price. Over the past five years, this UK share has fallen 19%.
That reflects a very real risk: declining cigarette consumption in many markets. Less cigarette smoking could lead to lower revenues and profits.
Still, the cigarette business remains substantial, despite being in decline. British American has a portfolio of premium brands like Lucky Strike I think can help it build business beyond the cigarette format. Its cash generation remains formidable.
Financial services
There are lots of financial services firms with high single-digit percentage yields I would happily own in my ISA.
I would not want to concentrate my holdings too much on a single sector, though, so would buy just two of them: M&G and Legal & General.
I think both firms are set to benefit from strong long-term demand for financial services. Thanks to their respective brands and customer bases, they should be able to continue prospering. That could help both of these UK shares.
One risk I see is a market downturn. That could lead customers at both firms to withdraw funds, hurting profits.
Legal & General has an 8.7% yield, while M&G offers 10%.
Investment trust
I would also put some of my ISA into City of London Investment Trust. As an investment trust, it offers me exposure to dozens of large, mostly British companies.
If the fund manager makes poor choices, the share price could fall. Indeed, it has slipped 1% in the past five years while the FTSE 100 has moved up 11%.
Its 4.9% yield attracts me, though.
High street name
My fifth ISA pick for passive income has a similar yield, at 5%: Sainsbury.
Demand for groceries should remain high even if pricing pressure risks profit margins falling. Sainsbury has a substantial online business as well as its traditional network of supermarkets.
Let the income roll
I think that range of UK shares would give me the right mixture of passive income potential and diversification.
The average yield is 7.7%.
So, putting £20K into the shares today would hopefully earn me around £1,540 in annual dividend income. That is equivalent to nearly £30 per week.
