How I’d invest my £20k ISA allowance to target £1,400 a year from dividend shares

With the London stock market depressed, it’s a terrific time to generate a second income from investing in dividend shares.

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Investing in dividend shares can be great way to generate a second income.

There are plenty of well-established companies on the London stock market and many have big yields right now. That’s partly because British shares have been depressed for some time. It’s no secret the domestic stock market offers some of the keenest valuations internationally at the moment.

I’m seeing a lot of opportunities in the financial sector. For example, as I type (11 March), Legal & General anticipates its dividend yield will be just over 8.6% for 2024. There’s also Aviva expecting to yield more than 7% this year, M&G at well over 8%, and Phoenix at more than 10%.

Economically sensitive

I admit these businesses are sensitive to the general economic environment, and there could be risks in that situation for shareholders. However, they each have stable multi-year dividend records and all appear to be trading well.

Meanwhile, other sectors have interesting companies too, such as property-focused Supermarket Income REIT. The firm anticipates a dividend yield well above 7% for the new trading year starting in June. I also like National Grid and Telecom Plus in the utilities sector with their forecast yields of 5.6% and 5.8% respectively.

Another to run the calculator over is (LSE: MONY) – the price comparison website provider. After a little wobble during the pandemic, the business has been stable and the company is chalking up a respectable multi-year dividend record.

With the share price near 239p, the forward-looking dividend yield is just above 5% for 2024. City analysts expect the payment to grow by about 5% in 2025. But can the dividend keep growing in the years beyond that?

To make it into my portfolio, I like stocks to have the potential for ongoing dividend expansion and looks well placed to do that. The company’s comparison websites have become part of a well-established routine for many consumers, including me.

But, of course, I’m not the only one happy with the firm’s services. The full-year results for 2023 show sound growth in most of the right numbers.

Strong brands

I do wonder whether competition may eat into the firm’s revenue and profits at some point. But the business has considerable momentum and strong brands such as MoneySuperMarket, MoneySavingExpert and Quidco. Perhaps these well-known names can help to keep the competition at arm’s length.

There’s no guarantee of a positive long-term investing outcome from all the stocks mentioned, even though they have large dividend yields now. All businesses can suffer from ups and downs in trading.

However, I’d aim to embrace the risks to align my portfolio with the potential for gain. But thorough research and diversification between investments is essential to help keep those risks as low as possible.

The average yield of the companies mentioned here is just over 7%. Meanwhile, adults in the UK will have their ISA allowance of £20,000 renewed on 6 April. So if I can find that much money and spread it equally between each stock, the portfolio could deliver an annual income of about £1,400.

That’s a tempting prospect. So I’m filling my watchlist with these promising high-yielding-stock candidates and researching my way through them right now.

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.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended M&g Plc and 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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