The idea of generating a 7% dividend yield from my Stocks and Shares ISA is appealing to me for the boost it could give to my passive income streams. If I had £20,000 in an ISA and wanted to aim for that target – and the £1,400 in annual dividends it could generate – here is how I would go about it.
First things first
Although I have a target yield in mind here, I never start my hunt for shares by looking at yields. Instead, I search for what I see as great companies trading at an attractive price. Only if I find some that I would think about buying do I then consider their yields.
So although I am narrowing down my search here to firms that can provide an average 7% yield, the tail is not wagging the dog. My focus is on finding the right companies in which to invest. If they are not of high enough quality, or too expensive, I will not buy them for my Stocks and Shares ISA, regardless of any yield.
Going for an average
One important risk management principle I use when investing is diversification. With £20,000 to invest, I would have ample funds to do that. For example, I might put £2,000 into each of ten shares.
That also means that I can hit an average yield of 7% even if not all of my shares have that yield. By buying some that have a lower dividend yield but balancing them with higher payers, I should still be able to hit my target.
What sort of shares could yield 7%?
The average dividend yield of 7% might sound quite high. After all, some FTSE 100 shares do not pay dividends at all while other popular dividend payers such as Diageo and Shell yield less than 4%.
But I think it is possible to identify shares that pay the sorts of yields that could help me hit my target, even among the blue-chip shares of the FTSE 100. Several sectors are promising places to start.
For example, British American Tobacco yields 6.4%, while rival Imperial Brands offers 6.8%.
Among financial services providers, M&G yields 9.6% and insurer Phoenix offers 8.3%. High yielders from other sectors I would consider for my Stocks and Shares ISA include Vodafone with its 8.4% yield and Persimmon.
Housebuilder Persimmon has an 18% yield at the moment, though it has signalled that a dividend cut is on the way. Even after such a cut, it may have a yield at or above 7%. But the proposed cut is a good reminder of the value of diversification – and why I focus first on finding the right companies, not merely chasing the highest yield. A high yield can signify investor concerns about elevated risks.
Investing my ISA
A lot of these companies are in mature industries, so it would limit my hopes for future growth.
Yet from an income perspective, I see some strong contenders currently selling for attractive prices. With £20,000, I believe I could invest my Stocks and Shares ISA in blue-chip shares yielding an average 7%.
