How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here’s how I’d go about it, starting today.

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Some of the FTSE 100‘s dividend shares look very tasty now.

The ones I like the best are in just a few sectors though. And as a new investor, I’d want diversification. But I have a way to get some of that with just three stocks.

ISA start

If I had £20k now to start my first ISA, what would I do? First, I’d open my ISA right away, before the deadline.

Then I’d pay in the cash… and relax. There’s no deadline for actually buying shares.

Still, I know the three stocks I’d want today.

Big dividend

First is Phoenix Group Holdings, for its 10% dividend yield. And also because I think insurance stocks are among the best long-term FTSE 100 buys.

It can be a volatile sector, and I’d expect ups and downs from this one, for sure. But Phoenix just affirmed a progressive dividend policy, so I think that makes the yield a bit safer than usual. And today’s valuation seems like a good one to get in at.

I see some great bank dividends out there too. But I’d skip those for the sake of diversification, and save them for my next ISA allowance. Oh, that’s in just a few days.

Cheap housing

A housebuilder’s a must, and they all look good to me. So I think I’d go for the 6.8% dividend from Taylor Wimpey.

I still expect a tough couple of years ahead, as the full effects of high inflation and interest rates could take some time to feed through.

But I’d buy for the long term. And for decades, we’ve had high housing demand and a supply shortage.


Finally, City of London Investment Trust (LSE: CTY), which spreads its money across a range of top-quality FTSE stocks.

With one buy, I’d snap up some BAE Systems, RELX, Shell, HSBC Holdings, Unilever… and they’re just the investment trust‘s top five holdings, with plenty more.

The dividend yield’s been around 5%, which isn’t the biggest. But it’s on the Association of Investment Companies’ list of ‘Dividend Heroes’, which have raised their dividends for at least 20 years in a row.

Dividend rises

City of London has managed it for 57 straight years now. If it should be unable to lift the cash one year, I could see a share price slump. But the diversification must help.

The question is, how would I spread the cash? I think I’d be happy with 50% of my money in City of London, with 25% in each of the others. Each investor needs to decide on their own spread.

But this allocation would get me an overall dividend yield of 6.7%.

My £4,900?

So how could I get my £4,900 a year? Well, a single £20k ISA spread across these three stocks and held for 20 years could get me there. That’s assuming 6.7% a year, reinvested, and no share price gains.

Alternatively, investing just £5k every year in an ISA could get me there in just over 10 years.

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.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Alan Oscroft has positions in City Of London Investment Trust Plc. The Motley Fool UK has recommended BAE Systems, HSBC Holdings, RELX, and Unilever 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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