One of the things I like about a Stocks and Shares ISA is the opportunity it offers me to earn extra income in the form of dividends. Whether I spend that passive income or keep it within my ISA to build my portfolio by purchasing more shares, I am happy to have it.
There are some juicy-looking yields available in the London stock market at the moment.
Imagine I wanted to target a 7.3% yield from my Stocks and Shares ISA – hopefully earning £1,460 in dividends annually as a result. Here is how I would go about it.
Good investing principles
I would follow a few basic ideas about how to invest.
For example, I would diversify by spreading my £20K evenly across five to 10 different shares.
Rather than investing in things I do not understand but hope could be the next big thing, I would stick to proven, sizeable businesses I can personally understand. That would not limit me to the FTSE 100, but my focus would be on buying quality blue chips.
When hunting for lucrative dividend streams, one classic, sometimes very costly, mistake is to buy high-yield shares that also have big risks.
So I would instead aim to buy into great businesses at attractive valuations.
If an investment opportunity does not meet that bar, it does not merit a place in my Stocks and Shares ISA, no matter how juicy its current yield may be.
Finding shares to buy
What would be an example of such a share?
Consider a business I already own: British American Tobacco (LSE: BATS).
With a stable of premium tobacco brands like Lucky Strike, the business is a cash flow machine. That helps fund a sizeable dividend that has grown annually for decades.
That might not last, I realise.
Cigarette sales are falling in many markets year after year. That is a mortal threat to revenues and profits for British American.
Still, for now, cigarettes remain huge business even if the long-term outlook is weak. I think British American can use its brand portfolio and expertise to grow its business in non-cigarette tobacco products, such as vapes.
Building the portfolio of quality businesses
Buying British American shares now would earn me a prospective yield of 9.6%.
I would be happy to add to my holdings of fellow FTSE 100 members Vodafone and M&G, yielding 11.2% and 9.0% respectively.
Both face risks that might be reflected in the yield. Vodafone has a lot of debt and has been selling businesses. That could hurt revenues but I like the firm’s strong brand and large customer base. I feel the same about M&G’s business and brand. I see a key risk as shaky financial markets leading to policyholders pulling out funds.
Diageo yields a much lower 2.8%. But I would buy it and 3.9% yielder Unilever.
Why?
Both benefit from unique premium brands that give them pricing power in large markets. But inflation and reduced consumer spending are a risk in each case.
Money money money!
If I invested my £20,000 evenly across that handful of large, blue-chip FSTE 100 firms, I would earn an average 7.3% yield.
That ought to earn me almost £1,500 in dividends annually from my Stocks and Shares ISA.
