One of the things I like about a Stocks and Shares ISA is the opportunity it offers me to earn extra income in the form of dividends. Whether I spend that passive income or keep it within my ISA to build my portfolio by purchasing more shares, I am happy to have it.
There are some juicy-looking yields available in the London stock market at the moment.
Imagine I wanted to target a 7.3% yield from my Stocks and Shares ISA – hopefully earning £1,460 in dividends annually as a result. Here is how I would go about it.
Good investing principles
I would follow a few basic ideas about how to invest.
For example, I would diversify by spreading my £20K evenly across five to 10 different shares.
Rather than investing in things I do not understand but hope could be the next big thing, I would stick to proven, sizeable businesses I can personally understand. That would not limit me to the FTSE 100, but my focus would be on buying quality blue chips.
When hunting for lucrative dividend streams, one classic, sometimes very costly, mistake is to buy high-yield shares that also have big risks.
So I would instead aim to buy into great businesses at attractive valuations.
If an investment opportunity does not meet that bar, it does not merit a place in my Stocks and Shares ISA, no matter how juicy its current yield may be.
Finding shares to buy
What would be an example of such a share?
Consider a business I already own: British American Tobacco (LSE: BATS).
With a stable of premium tobacco brands like Lucky Strike, the business is a cash flow machine. That helps fund a sizeable dividend that has grown annually for decades.
That might not last, I realise.
Cigarette sales are falling in many markets year after year. That is a mortal threat to revenues and profits for British American.
Still, for now, cigarettes remain huge business even if the long-term outlook is weak. I think British American can use its brand portfolio and expertise to grow its business in non-cigarette tobacco products, such as vapes.
Building the portfolio of quality businesses
Buying British American shares now would earn me a prospective yield of 9.6%.
I would be happy to add to my holdings of fellow FTSE 100 members Vodafone and M&G, yielding 11.2% and 9.0% respectively.
Both face risks that might be reflected in the yield. Vodafone has a lot of debt and has been selling businesses. That could hurt revenues but I like the firm’s strong brand and large customer base. I feel the same about M&G’s business and brand. I see a key risk as shaky financial markets leading to policyholders pulling out funds.
Diageo yields a much lower 2.8%. But I would buy it and 3.9% yielder Unilever.
Why?
Both benefit from unique premium brands that give them pricing power in large markets. But inflation and reduced consumer spending are a risk in each case.
Money money money!
If I invested my £20,000 evenly across that handful of large, blue-chip FSTE 100 firms, I would earn an average 7.3% yield.
That ought to earn me almost £1,500 in dividends annually from my Stocks and Shares ISA.
The post Here’s how I’d invest £20K in a Stocks and Shares ISA to target a 7.3% yield in 2024 appeared first on The Motley Fool UK.
Pound coins for sale — 51 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p 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 8.5%, 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
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More reading
Here’s how this 10% dividend star could make me £500 a month in passive income
3 FTSE 100 Dividend Aristocrats investors should consider buying
£17,000 in savings? Here’s how I’d try to turn that into £1,552 a month of passive income!
How much passive income could I get from the UK stock market in 2024?
Could buying cheap FTSE 100 shares help me get richer in a decade?
C Ruane has positions in British American Tobacco P.l.c., M&g Plc, and Vodafone Group Public. The Motley Fool UK has recommended British American Tobacco P.l.c., Diageo Plc, M&g Plc, Unilever 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.
