Here’s how to invest £20K in an ISA to target a 7% dividend yield

Is £1,400 in passive income each year possible from a £20K ISA while sticking to blue-chip FTSE 100 shares?This writer thinks so!

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

A Stocks and Shares ISA can give me a platform for buying into companies that hopefully grow in value over time. Along the way though, it can also potentially be a source of passive income in the form of dividends.

If I had £20K in an ISA and wanted to target a 7% yield – equivalent to £1,400 each year, or almost £27 per week on average – here is how I would go about it.

Chasing yield alone is a fool’s errand

Perhaps surprisingly, I would not start by thinking about the 7% figure. Why?

Dividends are never guaranteed, no matter how much a company may have paid out before. So a share that yields 7% today can yield 0% tomorrow.

At the start of last year, Direct Line yielded around twice that much before axeing its dividend altogether. It has since come back, but at a much lower level.

So, to try and avoid falling into a value trap, I would look for companies that I think have a strong enough business and clean enough balance sheet to sustain a chunky shareholder payout over the long term.

Some characteristics of a good dividend share

As an example, I would point to Legal & General (LSE: LGEN).

It ticks a lot of the boxes I look for when it comes to buying dividend shares for my ISA. I do not own it, but would be happy to buy it if I had spare money to invest.

For a start, there is the target market. It is large, resilient and deep-pocketed. People spend a lot of money on retirement-linked financial services, often over the course of decades. Then there are the competitive advantages enjoyed by the firm. It has a familiar brand, long experience and large customer base.

That has helped make it consistently profitable in recent years. It plans to raised its dividend by 5% this year and 2% annually in the years after that. So the current 8.7% dividend yield could be set to become even juicier.

Even Legal & General has cut the payout before though. The 2008 financial crisis led to that and I see a risk that any sudden market downturn could hurt profits badly and see another cut.

As a long-term investor, though, I think the future for the firm looks promising.

Constructing a high-quality blue-chip portfolio

Owning a share like Legal & General ought to earn me more than my target dividend yield.

So I could hopefully still hit my target even if some of the shares I bought yielded less than 7%.

Right now in the FTSE 100 there are plenty of blue-chip shares earning 7% or higher besides Legal & General. From HSBC to M&G and Phoenix to Imperial Brands, quite a few firms offer such high yields.

Sticking to the share selection principles outlined above, I believe I could choose the right ones for my ISA and realistically aim for £1,400 in annual dividends.

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. C Ruane has positions in M&g Plc. The Motley Fool UK has recommended HSBC Holdings, Imperial Brands Plc, and M&g 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.

More on Investing Articles

Investing Articles

Could this beaten-down UK growth stock be the next Rolls-Royce?

Mark Hartley feels Rolls shares have had their time and are running out of steam. Now he’s searching for the…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Down 10% in a month! What’s gone wrong with the BAE Systems share price?

Harvey Jones suspected all was going a bit too well for the BAE Systems share price. Things went wrong immediately…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Are BT shares still a bargain after climbing 30%?

BT shares are finally showing signs of life after years in the doldrums. Harvey Jones thinks this may point to…

Read more »

Investing Articles

£10k in an ISA? Here’s how I’d aim to generate a ton of passive income

I dream of escaping the shackles of a salary with financial independence and a steady stream of passive income. Here’s…

Read more »

Investing Articles

Are Burberry shares a bargain or a value trap?

Appearances can be misleading in the stock market. Shares that look like a bargain can turn out to be a…

Read more »

Investing Articles

How I’d target £17,673 passive income with just £100 a week

Our Foolish writer explains how he’d build a portfolio capable of generating a life-changing passive income with limited capital.

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

If I’d put £20k into a FTSE All-Share tracker fund 10 years ago, here’s what I’d have now

A lot of UK investors have money in FTSE All-Share tracker funds. Here, Edward Sheldon looks at how these products…

Read more »

Investing Articles

How I’d invest £10k in a SIPP to target £28,000 annual passive income

Investing just £10k today in a SIPP could be the key to a chunky retirement income in the long run.…

Read more »