A Stocks and Shares ISA’s a terrific tool to earn tax-free income. These special types of accounts have their limitations. But once capital’s put to work inside of an ISA, any capital gains and dividends earned are free from the hungry HMRC.
What’s more, even after enjoying a bit of a rally this year, there are still plenty of underappreciated dividend stocks trading at discounts. That means investors have a rare chance to lock in some higher payouts.
In fact, establishing an 8%-yielding portfolio without taking on excessive risk is now far easier. So let’s explore how to do it.
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.
The issue of high yields
Building a portfolio that generates 8% in dividends right now isn’t difficult. Investors can simply use a screening tool to find high-yielding shares and then just diversify across these companies. However, while that would unlock an 8% yield today, there’s a good chance it won’t last.
Don’t forget that yields are driven by dividends and share prices. When the latter falls, yields go up. And often the catalyst behind the drop is linked to poor business performance. In turn, that typically translates into dividend cuts.
So when seeking to build an 8% ISA, investor focus should be on sustainability and growth potential, not the yield. This may even require investing in businesses currently offering significantly less than 8%. But if chosen wisely, these firms could grow shareholder payouts over time, eventually delivering on the 8% target, or even surging past it.
The biggest dividend winner in the UK
There are quite a few impressive dividend track records among leading UK shares. However, most pale in comparison to the results Safestore (LSE:SAFE) has achieved.
Fifteen years ago, this stock offered investors a fairly average payout of 3.3%. That’s less than the FTSE 100’s historical 4% yield. However, by capitalising on opportunities in the self-storage market’s growth, management was able to consistently and significantly increase cash flows. As a result, dividends for 2023 came in at 30.1p per share. That means investors who held on for all this time are now reaping a jaw-dropping yield of 21.5% – and it’s still growing.
As the largest self-storage operator in the UK, Safestore comfortably dominates in terms of local market share. That’s why management’s begun expanding into Europe in search of new growth opportunities within the Benelux region.
However, I think it’s unlikely that investors will see another 550% surge in payouts over the next 15 years. After all, interest rates are now much higher, making growth far more challenging and expensive. But that doesn’t mean there aren’t other dividend-growth enterprises awaiting discovery.
Therefore, when aiming to build an 8%-yielding Stocks and Shares ISA, I’d focus my efforts on investing in top-notch stocks with the capacity to grow dividends each year instead of hunting down the biggest yields today.
