Loads of people buy dividend shares to help give them a second income stream. But there are so many to choose from it can sometimes be bewildering. After all, on the FTSE 350, 305 stocks have paid a dividend over the past 12 months.
But I reckon those wanting their Stocks and Shares ISA to give them a generous passive income of £400 a month should focus on the FTSE 100, where there are some stocks — based on amounts paid over the past 12 months — that are currently (5 February) yielding 5% and above. Let’s take a closer look.
Some examples
With a 5% yield, an ISA would need to be worth £96,000 to produce £400 a month (£4,800 a year) in dividends. FTSE 100 shares offering this kind of yield include Imperial Brands (5%), BP (5.1%), and British American Tobacco (5.3%). For those preferring not to invest in ‘sin stocks’, a similar return can be found with British Land (5.5%) and Aviva (5.8%).
An ISA worth £80,000 with a 6% yield, would also produce income of £400 a month. There are four Footsie stocks presently yielding 6%-7% – Land Securities Group (6.1%), Londonmetric Property (6.2%), Admiral Group (6.3%), M&G (6.6%), and Mondi (6.8%).
The one stock yielding 7%-8% is Phoenix Group Holdings (7.3%). An ISA valued at £68,571 would be sufficient with a return at this level.
Top of the shop
That brings us to the only stock yielding more than 8%, Legal & General (LSE:LGEN). With its 8.1% return, an ISA would need to be worth £59,259 to achieve our second income target.
In fact, I hold the insurance and pension group in my own ISA. I like the fact that the personal pensions market is likely to grow strongly over the coming decades with an ageing population and increasing state retirement age being the biggest drivers. The group’s also doing well in the pensions risk transfer market, with trustees looking to offload funds while conditions remain favourable.
However, it faces some fierce completion, which is likely to intensify as others see the huge potential. And in common with other investors in bonds and equities, it’s vulnerable to a market downturn or worse.
But Legal & General has a strong balance sheet that comfortably meets industry solvency requirements, retains a reputable brand, and has shown in its 190-year history that it’s successfully been able to adapt to changing circumstances.
When combined with its generous dividend, I think the stock has lots going for it.
Spreading risk
Of course, it’s impossible to guarantee that healthy dividend yields will continue into the future. And it would be very risky to have just one stock in an ISA. That’s why I think Legal & General could be considered as part of a diversified well-balanced portfolio of income stocks.
I would have to do more research into all 12 companies that I’ve mentioned before deciding whether to consider them. But their average yield of 6.2% is impressive.
For illustrative purposes, putting all of them into an ISA worth £77,419 would be sufficient to earn the equivalent of £400 a month in dividends. I reckon that’s a great return for doing very little.
