With a Stocks and Shares ISA, British investors can target high dividend yields without having to worry about taxes. It’s a powerful advantage that, at a 7% payout, could provide £1,400 of passive income each year for every £20,000 saved. And that’s before considering the extra returns provided by capital gains.
Unfortunately, dividends aren’t guaranteed. These payments are a way for companies to return excess earnings back to shareholders. And therefore if revenue and profits become compromised so might the secondary income stream for investors.
That’s why high dividend yields are often considered to be a red flag since they’re much harder to sustain. Yet, there are always exceptions to this rule. And right now, plenty of UK shares are maintaining chunky payouts for investors to capitalise on.
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.
Exploring options
Right now, looking across the FTSE 350 index reveals that 30 stocks are currently offering a payout of at least 7%, or higher. And for the most part, these businesses operate in different industries including energy, real estate, financial services, tobacco, and telecommunications.
That’s terrific news for investors since it makes it far easier to build a diversified, high-yield portfolio. And diversification’s a terrific way to keep risk in check. After all, should something suddenly go wrong, and a company announces a dividend cut, other investments in different sectors are less likely to be affected. Subsequently, the adverse impact on the income generated by the portfolio is significantly reduced.
But sadly, a large chunk of the 30 high-yielding opportunities right now come paired with a lot of risk.
Risk to an ISA
Let’s take a look at British American Tobacco (LSE:BATS) as an example. The cigarette empire currently rewards shareholders with an impressive payout of 8.8%. And what’s more, it’s been consistently hiking dividends for more than 25 years in a row – a feat that’s defied a lot of analyst expectations.
Turns out, even with increased awareness of the adverse health effects of smoking, demand for cigarettes and tobacco remains strong, as does the group’s cash flows. That’s why management has been able to maintain its generous dividend policy all these years.
However, management isn’t blind to the shifting regulatory landscape. Increasingly strict rules about the sale and manufacturing of tobacco-based products are making life quite hard for British American Tobacco to continue expanding. That’s why leadership has been investing heavily in healthier alternatives such as e-cigarettes and vaping devices.
It’s encouraging to see the business adapt, and it certainly bodes well for its long-term survivability. Yet, that doesn’t guarantee its dividends are here to stay. The firm’s vaping products, while initially launched with good momentum, have started seeing demand fall off in the face of rising competition.
Unlike cigarettes, the company hasn’t established a dominant portfolio of brands yet. In the meantime, the core traditional portfolio of tobacco products is slowly losing steam.
This is why the dividend yield’s currently so impressive. There’s a lot of uncertainty about whether British American Tobacco can overcome these challenges and transform itself before it’s too late.
It’s a similar story with the other high-yield income opportunities in the FTSE 350 right now. Investors must investigate to uncover which companies are worth taking the risk to ensure that a high-yield Stocks and Shares ISA today stays that way in the long run.
The post How to invest a £20k Stocks and Shares ISA to seek a 7% dividend yield appeared first on The Motley Fool UK.
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More reading
I’d buy 18 shares a month of this FTSE 100 stock for £1,000 a year in passive income
Looking for shares to buy with dividend yields over 7%? I’d consider these 3!
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No serious savings? I’m using the Warren Buffett method to build wealth!
All yielding over 6%, which of the FTSE 100’s top 10 passive income stocks is the best?
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. 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.
