Putting £20,000 into a Stocks and Shares ISA, I think I could generate quite a substantial flow of dividends. Here is the approach I would take if I wanted to target an 8% dividend yield on my ISA.
Yield as an end not a beginning
Although my focus is on yield I would not start simply by looking for high-yield shares. They could be yield traps. These are shares that looks like they have a high yield based on historical data, but it may not last.
Yield traps can be costly for investors. Not only does the yield end up being less than expected, but a dividend cut can also lead to the share price falling.
Instead, I look for great businesses selling at an attractive price. By that I mean companies that have a competitive edge in a market I expect to see large and sustained customer demand. Only once I find such companies do I then consider the yield they may offer me.
Diversifying my Stocks and Shares ISA
As an investor I seek to reduce my risk by diversifying my portfolio across a range of companies and business areas.
Having £20,000 in a Stocks and Shares ISA would be ample to do that. For example, I could invest £2,000 into each of 10 companies.
Note that I do not diversify just across companies, but also business sectors. Some sectors have very juicy yields right now. For example, in the tobacco industry I own British American Tobacco, which is yielding 6.6%, Imperial Brands, yielding 6.9%, and Altria at 8.0%.
Similarly, financial services offers a range of high yielders, like 10.1%-yielding M&G and Jupiter at 13.3%. I have invested in both.
But just investing in one sector also brings a concentration risk. Tobacco regulations could hurt demand across all manufacturers, for example, while a recession could heighten risks for all financial services companies. So I would make sure to spread my Stocks and Shares ISA across different industries, not only different companies in one sector.
Aiming for an 8% target
If my target is 8%, I do not need to invest only in shares with that yield. As long as my average is 8%, it is fine if some shares offer me less.
Take the five shares I mentioned above as an example. Two of them yield under 7%. But the average of the five is nearly 9%.
On that basis, I do think an 8% target is realistic in today’s market. I am alert to the risks sometimes suggested by high yields. Jupiter, for example, will introduce a new dividend policy in 2023 that means its dividend yield looks unlikely to be sustained.
But if I do my homework, focus on finding great businesses at attractive prices, and manage my risks appropriately, I think I could generate an 8% dividend yield each year from my Stocks and Shares ISA.
The post How I’d invest a £20,000 Stocks and Shares ISA to target an 8% dividend yield appeared first on The Motley Fool UK.
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C Ruane has positions in Altria Group, British American Tobacco P.l.c., Jupiter Fund Management Plc, and M&g Plc. The Motley Fool UK has recommended British American Tobacco P.l.c., Imperial Brands Plc, and Jupiter Fund Management Plc. 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.