Here’s how I’d invest a £20k Stocks and Shares ISA for a 15% dividend yield

Can investors generate a £3,000 annual passive income by investing £20,000 in a Stocks and Shares ISA? Yes, if the right strategy is used.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young mixed-race woman jumping for joy in a park with confetti falling around her

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.

The idea of generating a yield of 15% in a Stocks and Shares ISA is undoubtedly appealing. After all, that’s nearly double what the FTSE 100 typically generates after capital gains. And in terms of passive income, it translates to earning £3,000 a year for every £20,000.

That means if an investor were to max out their annual ISA limit for 10 years, they’d be earning close to £30,000 a year without doing any work. So how can investors try to turn this fantasy into a reality?

Earning a 15% yield

First things first, earning double-digit dividend returns requires venturing beyond index funds and into the realm of stock picking. The FTSE 100 may have a generous yield compared to the S&P 500. But it still sits at just 3.6% right now, and I’m after considerably more.

Should you invest £1,000 in Safestore Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Safestore Plc made the list?

See the 6 stocks

The good news is stock market volatility from the past few years has kept plenty of shares in the gutter. Yet even with this, there are still only two companies in the entire FTSE 350 whose dividend yield is 15% or more – Ithaca Energy and Diversified Energy Company. And the latter has recently cut shareholder payouts.

That’s not enough to build a well-balanced portfolio. So where does that leave investors?

Unlocking a high yield requires a particular type of investment – dividend growth stocks. These shares often don’t provide much in terms of initial yield. However, their ability to consistently hike shareholder payouts can be transformative when left to run.

Safestore Holdings (LSE:SAFE) is a prime example of this. The self-storage operator’s currently sitting on 14 years of annual dividend hikes, averaging a 17.5% expansion each time. And investors who spotted this opportunity early on aren’t earning a 15% yield today but rather a 21% payout despite starting from just 3.2% in 2009.

Finding quality dividend growth stocks

It’s easy to look back and say, “If I bought X, I’d have Y”. But by studying previous successes, investors can uncover recurring themes to identify the next Safestore-like investment.

So what was behind the group’s success? Free cash flow. Safestore doesn’t have much in terms of operating costs. After developing a new location, the cost of maintenance is only a fraction of the rental capital flowing in.

This dynamic lends itself to higher margins. As profitability rises, capacity for debt increases, opening the door to more growth which, in turn, leads to more free cash flow. The result is a value-building loop paired with an ever-increasing dividend. And finding other companies with their own sustainable loop is how I’d start building a 15%-yielding Stocks and Shares ISA today.

However, there are always risks to consider. Safestore’s reliance on debt has proven to be a significant handicap when interest rates started rising. Adding more fuel to the fire, the weakness within the real estate sector also dragged down property values. As a result, if Safestore’s cash flows had become compromised, selling off some of its assets would have likely destroyed value just to stay afloat.

Luckily, that hasn’t happened. But it’s not an impossibility. Neither are the other threats dividend growth stocks have to overcome to maintain their continuous streaks of payout hikes. Nevertheless, if chosen wisely, a portfolio of these stocks could generate an enormous passive income in the long run.

Should you invest £1,000 in Safestore Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Safestore Plc made the list?

See the 6 stocks

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.

Zaven Boyrazian has positions in Safestore Plc. The Motley Fool UK has recommended Safestore 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

Here’s the dividend forecast for Rolls-Royce shares as Trump rocks the markets

Rolls-Royce shares have joined in the volatility over the past week. However, with the direction being largely downwards, the dividend…

Read more »

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

Dividend yields of up to 11%! Here are 3 UK passive income stocks to consider

Searching for ways to supercharge your passive income with UK dividend stocks? Here are three that have grabbed our writer's…

Read more »

Young Caucasian woman at the street withdrawing money at the ATM
Investing Articles

£10,000 invested in NatWest shares at the start of 2025 is now worth…

NatWest shares surged into 2025, but things have become a little more complicated in recent weeks. Dr James Fox explores.

Read more »

Investing For Beginners

Why the FTSE 250 could outperform the FTSE 100 for the rest of the year

Jon Smith explains why the FTSE 250 could do better than its big brother when factoring in domestic exposure and…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Tariff fears send the Lloyds share price tumbling, but the dividend yield is climbing

Just when the Lloyds Banking Group share price had been rising steadily, along comes a global upheaval to knock it…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Here’s how a stock market crash could help an investor retire years early

A stock market crash can be alarming -- but for the well-prepared investor, it can also be an exceptional opportunity…

Read more »

Investing Articles

1 key fact to remember in this stock market correction

This writer takes a look at a FTSE 100 investment trust that is catching his eye after the recent massive…

Read more »

Investing Articles

I was wrong about the Tesla stock price!

Tesla stock's been affected more than most by ‘Liberation Day’. But our writer has other concerns about Elon Musk’s company.

Read more »