Recent market turbulence has thrown up some interesting investment opportunities. Take my Stocks and Shares ISA, for example. If I put £20,000 into it today and invested in dividend shares, I think I might be able to set up some tidy passive income streams for the future. Thanks to the price of some shares tumbling lately, their dividend yields have increased.
I would not buy a share just for its yield. But if I think it is a quality business selling at an attractive share price, a higher yield than it previously had sounds good to me!
Take Direct Line as an example. Its share price has tumbled 38% over the past year. That means its yield is now over 12%. By investing in shares like Direct Line, here is how I could target £2,000 in annual dividend income right now.
Separating short-term risks and long-term prospects
There is a reason Direct Line shares have fallen so much. Its pre-tax profit in the first half tumbled by 31%. It ended the period with 9% fewer policies in force than at the beginning. Risks such as cost inflation making claims settlement more costly pose a further risk to profits.
All of these risks strike me as concerning. But I see them as essentially short- and medium-term bumps in the road for the motor and general insurer. In the long term, I think the business should be able to benefit from ongoing demand for insurance and its strong brand.
Looking at things with a long-term investing mindset, l think Direct Line could fit well in my ISA and would be happy to buy its shares today if I had spare money to invest.
Finding dividend shares to buy
Achieving £2,000 a year in dividend income would require me to invest my £20,000 in shares with an average dividend yield of 10%.
But that is only an average. To reduce my risk, I would diversify the Stocks and Shares ISA across five to 10 different investments in equal amounts. So if I bought Direct Line with its yield of over 12%, for example, I could buy other shares yielding less than 10% and still hit my average yield target.
That would open up the opportunity of investing in shares such as British American Tobacco with its 6.6% yield, rival Imperial Brands offering 8.6%, Vodafone on 7.4% and Legal & General on 8.7%.
Double-digit yielders
But I could also buy shares yielding more than 10% thanks to share price falls.
For example, I currently own stock of asset manager abrdn. Vowels are not the only thing the company has lost – its share price is 47% less than a year ago.
That means they now yield a juicy 10.9%. Like Direct Line, a share price fall of that magnitude suggests the company faces risks. A stuttering economy could lead to investors withdrawing funds, hurting revenues and profits. But I also see long-term opportunities thanks to abrdn’s established customer base and deep experience.
By building a basket of quality businesses in my Stocks and Shares ISA at bargain prices, I really believe I could try to set up an annual dividend income of £2,000.
The post How I’d invest a Stocks and Shares ISA today to target £2,000 in annual dividend income appeared first on The Motley Fool UK.
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C Ruane has positions in British American Tobacco, Imperial Brands, and abrdn. The Motley Fool UK has recommended British American Tobacco, Imperial Brands, and Vodafone. 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.