3 dividend stocks to consider for a Stocks and Shares ISA

Stephen Wright thinks buying dividend shares in a Stocks and Shares ISA is a great way of earning passive income. Here are three stocks he’d buy today.

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A Stocks and Shares ISA allows investors like me to buy shares worth up to £20,000 per year without having to pay tax on dividends. That makes it a great vehicle for housing a passive income portfolio.

Ultimately, though, the key to earning a good return is finding the right stocks to buy. Right now, three stand out to me as unusually good opportunities.

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.

Lloyds Banking Group

While the share price is below 50p, I think investors could do a lot worse than buy shares in Lloyds Banking Group (LSE:LLOY). Since the start of the year, the stock has fallen by 11%, taking the dividend yield to 6%.

Banking is an industry that inevitably goes through ups and downs with the macroeconomic cycle. While I don’t expect Lloyds to avoid this, I’ve been impressed by the firm’s ability to avoid making extra problems through mistakes of its own.

Over the last 10 years, the bank has paid out just under 20p in dividends per share – around half of the current share price. I think the company is likely to pay out more going forward, though.

Higher interest rates increase the risk of loan defaults, but should also allow the business to generate more cash over the next decade than the previous one. And ongoing share buybacks mean that cash has to be split between fewer claims.

Forterra

UK brick manufacturer Forterra (LSE:FORT) has also been under pressure lately. A slowing housing market is weighing on demand for the company’s products. As a result, the stock has fallen by 25% since the start of the year.

There’s good reason for this – revenues and profits are going to be lower this year than they were in 2022. But I think an end to rising interest rates could mark the start of a recovery for the business that the market isn’t properly factoring in yet.

With this stock, the investment thesis comes from taking the long-term view, though. Demand for bricks in the UK frequently outstrips supply, meaning the company should be able to to do well over time.

If inflation remains at elevated levels, there’s a risk margins could come under pressure. But even after a significant cut, the stock still comes with a 5% dividend. I think it has the capacity to grow that over time, too!

Realty Income

Last on my list is a US-listed real estate investment trust (REIT) called Realty Income (NYSE:O). The company leases retail properties to tenants and distributes its income to investors monthly in the form of dividends.

Like a lot of real estate businesses, the stock has been falling over the last few months. But a 22% decline since the start of the year means there’s a 6% dividend on offer for investors right now. 

The firm has been relying on acquisitions for growth, which introduces a risk of overpaying. It’s worth noting, though, that the company has been using this approach to increase its dividends every quarter for over 25 years.

I’m expecting growth to be steady, rather than spectacular. But with a 6% starting yield, I don’t think the dividend needs to increase substantially in order to be a very good source of passive income for investors.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has positions in Forterra Plc and Realty Income. The Motley Fool UK has recommended Lloyds Banking Group Plc. 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.

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