Uncertain economic times can bring lucrative opportunities for a patient buy and hold investor. That is the investing style I use for my Stocks and Shares ISA. Right now, I am excited by some of the dividend prospects open to me.
Here is how I would invest a £20,000 Stocks and Shares ISA right now to target a 9.6% yield. That would be equivalent to £1,920 of annual dividend income.
Why “right now“? Opportunities do not usually last forever. Just because current share prices offer me the chance of a yield almost in double digits, that could change tomorrow — and I may have missed the opportunity.
Putting together my 9.6%-yielding Stocks and Shares ISA
Before getting into the specific dividend shares to buy now for my Stocks and Shares ISA, let me lay out a couple of risk management principles I am adopting.
First, I would spread my money across a variety of shares and industries. That diversification should reduce the negative impact on my dividend income if any one share cut its payout for any reason. Specifically, I would spread the £20,000 by investing £4,000 in each of the five shares I discuss below.
Secondly, I would accept that high yield can often indicate elevated risk. There are actually double-digit high-yielders I am excluding from my choices for this very reason. For example, the political risks at Ferrexpo are too great for my appetite, while I think the cyclical nature of 10.8%-yielding miner Rio Tinto’s end markets could lead to a dividend cut the next time metal prices fall.
Still, the five shares I am choosing all have distinct risks of their own. For example, maybe a property fall could hurt the housebuilder I discuss below in the same way as a metal price crash could hurt Rio Tinto. So although the prospective yield of this portfolio is 9.6%, I would go into buying these shares with my eyes wide open. Even though they are mostly familiar blue-chip names, there are risks.
That said, here are the five prospective purchases for my Stocks and Shares ISA.
The insurance company Direct Line (LSE: DLG) has fallen out of favour with investors lately.
That has had the effect of pushing its annual dividend yield up to 9.3%. So, what is it that investors are worried about? After all, the company actually raised its dividend last year.
I think the main concern here is that new insurance rules designed to stop insurers price gouging loyal customers could eat into profit margins. The firm’s first-quarter update was indeed concerning in this regard. Revenues fell compared to the same period a year ago and the number of policies in force dropped even more.
But I think Direct Line’s well-established business and iconic red telephone branding could help it build customer loyalty. I reckon the new rules could end up forcing insurers to stop spending lots of time and effort on convoluted pricing mechanisms and focus more on quality customer service. That could end up helping, not hurting, big players like Direct Line in my view.
I would also buy another share for my Stocks and Shares ISA that operates in the financial services sector, M&G (LSE: MNG).
The investment manager has been dogged in the past couple of years by an uncertain outlook for its customer base. Investors have been concerned that weak investment performance could lead customers to move their business elsewhere, hurting both revenues and profits. Although I do still see that as a risk, the latest figures from M&G indicate a net inflow of funds. It also increased its dividend last year, albeit only very modestly. If I bought M&G shares in my Stocks and Shares ISA today, I could get an 8.8% yield. That seems very attractive to me.
Like Direct Line, M&G’s iconic brand and reputation are important. For financial services providers, reassuring potential and existing customers matters more than in many other areas of business. M&G’s long history and large base of assets under management help it do that.
The third dividend shares to buy now for my Stocks and Shares ISA would be housebuilder Persimmon (LSE: PSN).
These shares have also taken a tumble, falling 33% over the past year.
That is good news for the dividend yield, which now stands at 11.3%. But does it indicate City worries about the business prospects? I think the answer is yes. Growing storm clouds in the economy threaten a recession and housing market fall. It may not happen immediately but is on the cards in coming years. That could hurt both revenues and profits at housebuilders like Persimmon. On top of that, its juicy dividend is barely covered as it is.
But that is through choice. Persimmon pays a basic dividend and then also pays a special dividend as part of its strategy of returning a large part of its excess cash to shareholders. I like that focus on rewarding shareholders. I also think Persimmon’s high-margin, highly cash-generative business model is attractive for the long term and would consider adding it to my Stocks and Shares ISA now.
Income & Growth Venture Capital Trust
A lot of fast-growing small companies are not listed on the stock exchange. As a private investor, I cannot get direct exposure to their growth. That is where Income & Growth comes in. The venture capital trust invests in such companies, so if I buy its shares I can also benefit if the fledgling firms do well.
The trust’s dividends move around a fair bit, based on how its underlying investments do. If they fare badly, that could hurt the dividend. The trust managers have an impressive track record of picking some companies that do well. Right now, the dividend yield is 10.2%.
The fifth and final choice for my Stocks and Shares ISA comes from a predictable industry for dividend lovers. But a lack of excitement does not mean a lack of dividend potential.
The industry is tobacco and the choice for my portfolio is Imperial Brands. The owner of premium brands like Lambert & Butler yields 8.2% at the moment. Although declining cigarette sales in some markets pose a threat to revenues, its premium brands give Imperial pricing power. I think they could also support future growth in non-cigarette markets.
Boosting my Stocks and Shares ISA income today
The average yield of this selection of shares is 9.6%.
I could aim for that by buying the shares for my Stocks and Shares ISA — today.