For those looking to earn a second income, a Stocks and Shares ISA is a brilliant thing. That’s because all dividends can be enjoyed tax-free, making the investment vehicle particularly attractive for those who have taxable earnings elsewhere.
And with markets rocked by global uncertainty at the moment (13 March), there are plenty of shares whose yields are rising rapidly. Here are five that have recently caught my attention.
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.
Delving deeper
Currently, 15 FTSE 100 stocks offer a yield in excess of 5%. In fact, the five biggest are returning 7.5%. This is based on amounts declared over the past 12 months.
A £20,000 Stocks and Shares ISA with an equal investment in all five could produce a useful second income of £125 a month.
| Stock | Dividend yield (%) |
|---|---|
| Legal & General | 9.0 |
| Standard Life | 7.9 |
| M&G | 7.1 |
| Land Securities Group | 6.9 |
| LondonMetric Property | 6.4 |
| Average | 7.5 |
But if someone decided to reinvest the dividends and bought more shares in these companies, an initial sum of £20,000 would be worth £121,967 after 25 years. At this point, a 7.5% yield would produce a monthly income of £762.
This illustrates the power of compounding, which has been described as the eighth wonder of the world. Wow.
Number one
The highest on the index is Legal & General (LSE:LGEN).
On Wednesday (11 March), the pensions and insurance group announced a 2% increase in its 2025 dividend when publishing its results for the year. It also confirmed its intention to implement the same percentage increase for the next two years. In addition, it launched another share buyback programme worth £1.2bn, its largest ever.
But experienced investors know to treat high yields with caution. Ultimately, generous dividends may not be sustainable as they are a distribution of earnings. If a company’s profit is squeezed or a random event comes along to disrupt operations, it could lead to a cut in its payout as a way of preserving cash.
In the case of Legal & General, earnings could come under pressure from increased competition. There are plenty of companies out there looking to take over and consolidate existing pension schemes, and others offering pensions to those that have yet to start saving for their retirement. Many of these have lower cost bases than their larger, more established rivals.
Other risks to its earnings include a disappointing investment market performance and an increased regulatory burden.
A strong set of results
But Wednesday’s results suggest that the group’s successfully dealing with these challenges.
It reported a 9% year-on-year increase in core earnings per share. But core operating profit fell £26m short of analysts’ expectations. As a result, the company was heavily punished – unfairly, in my opinion – with investors sending the group’s share price 6.8% lower. Wiping £1bn off the group’s market cap looks like an over-reaction to me. However, one benefit of this for new investors is that the stock’s yield at the end of the day was 0.7 percentage points higher than when it started.
With its pension risk transfer business continuing to be the market leader in the UK, fee margins rising in its asset management business, a solvency II ratio of 210% (over twice the regulatory minimum), and a huge dividend which hasn’t been cut since 2009, I think the group has lots going for it. In fact, so many things that I think it could be considered by income investors as part of a balanced well-diversified portfolio.
