I like dividends. One of the attractions of investing in a Stocks and Shares ISA is the ability to use it to generate dividends and reinvest them. With that in mind, if I were targeting a 6% yield on £20,000 — equivalent to £1,200 of dividend income a year — here’s how I would invest. I’d put £2,000 into each of the 10 companies below. They are spread across five broad business areas. That would give me some diversification as a way of reducing my risk.
In natural resources, I’d plump for BP and Rio Tinto. Both currently have attractive yields — 4.9% and 7.6%. But resource pricing is cyclical and that means future dividends could well fall. BP cut its payout last year, for example. Having these two shares as part of a portfolio of 10 means that I could benefit from dividend income when resource prices are high, without being heavily reliant on the sector when resource prices fall.
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Tobacco shares are a common choice for their high-yield properties. I’d put £2,000 into each of British American Tobacco and Imperial Brands. Both face similar risks, such as a declining number of cigarette smokers in some markets hurting revenues and profits. But both yield over 8%. That makes them some of the highest-yielding shares in the FTSE 100 index. They benefit from large brand portfolios and wide geographic exposure.
I’d buy investment manager M&G. It yields 9.2% and plans to maintain or grow its dividend in future. Its wide client base and well-established brand attracts me. But risks include client withdrawals in some lines of business hurting profits.
I’d also invest in financial services provider and insurer Legal & General. It has set out plans to increase its dividend in coming years. The current 6% yield already looks attractive to me. Its iconic brand should help it retain customers, though pricing pressure in insurance could reduce profitability.
Consumer goods and retail
I’d also add a couple of consumer facing shares to my ISA. The yields are smaller than the shares above, but I like their broadly defensive qualities.
One is supermarket giant Tesco, which currently yields 3.6%. It has built a strong position in the UK market, though pricing pressure could hurt profit margins. I’d also invest in Unilever. The Dove maker currently yields 3.8% and would offer me global exposure. Its portfolio of premium brands give it pricing power, but cost inflation could squeeze its profit margins.
Finally I’d plump for two utilities. Network operator National Grid yields 5.2%. Its network is a strong competitive advantage. One risk is shifts in energy use increasing capital expenditure requirements and hurting profits. I’d also add in Jersey Electricity. It only yields 2.7%, but I like the highly defensive qualities of its geographically focussed operation. That could be a risk, too, though as it lacks geographic diversification of revenue streams.
6% yield for my ISA
Investing £2,000 into each of these 10 shares in an ISA would give me an average dividend yield of 6%. That could fall if dividends are cut. On the other hand, many of these 10 companies have a track record of dividend growth. If that continues, it could boost my future returns.