Investing in a stocks and shares ISA is a no-brainer for me. This tax-free account allows me to contribute up to £20k per year and pay zero tax on any capital gains or income generated within my ISA.
In this piece I’ll explain my ISA income strategy and look at how I might target a 6% average dividend yield from FTSE 100 stocks.
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.
Targeting a generous yield
My income focus means I want to generate a higher dividend yield from my portfolio than I could get from cash savings or a FTSE 100 tracker.
Let’s say I choose a target yield of 6%. This is the average I want to achieve from all the shares in the portfolio. It doesn’t mean that every stock I own needs to offer a yield of more than 6%.
Taking a portfolio approach gives me a wider choice of shares to consider buying. It also means I can include a mix of higher-yield and higher-growth stocks.
For example, here’s a selection of 10 FTSE 100 stocks. My sums suggest these would give me an average forecast yield of 6.4%, if I divided my funds equally between them:
Company
2024 f/cast div yield
Phoenix Group
10.1%
British American Tobacco
8.6%
Rio Tinto
6.8%
Land Securities
6.4%
Schroders
6.3%
Taylor Wimpey
6.1%
BP (LSE: BP)
5.6%
B&M European Value Retail
5.3%
Kingfisher
4.6%
GSK
3.9%
Average
6.4%
If I had £20k to invest from scratch today (I don’t), then I could build a portfolio with these stocks. I think they’d have the potential to give me with a reliable, market-beating income.
Of course, dividends are never guaranteed and can always be cut. To be honest, I’d prefer to target a portfolio of 15 stocks to provide a greater level of protection against dividend cuts and other problems.
But I think 10 is a good starting point – and with £20k to invest, I’d be able to put £1,000 into each. In general, I see this as a sensible minimum for buying individual shares, so that trading costs don’t eat into my returns too much.
Better buy BP?
One stock that’s caught my eye recently is energy giant BP (LSE: BP). Shares in the oil and gas group have fallen by 20% from their April highs, as the oil price has dropped.
BP’s share price slump has left the stock with a tempting 2024 forecast yield of 5.6%. I reckon that could be decent value for this business.
Although lower oil and gas prices may mean lower profits, BP’s dividend still looks very safe to me.
In the company’s recent half-year results, boss Murray Auchincloss confirmed the dividend should remain supported at oil prices down to $40 per barrel. As I write, Brent Crude is changing hands for $78 – nearly double the minimum needed to cover the dividend.
There are no guarantees, especially in the commodities markets. Events forced BP to slash its dividend in 2010 and 2020. It could happen again – and oil prices could drop below $40.
Even so, I think BP shares look decent value at the moment. I reckon they could be a good pick to consider for income right now.
The post How I’d invest £20k in a Stocks and Shares ISA to target a 6%+ dividend yield appeared first on The Motley Fool UK.
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Roland Head has positions in GSK. The Motley Fool UK has recommended B&M European Value, British American Tobacco P.l.c., GSK, Land Securities Group Plc, and Schroders 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.
