Sustainable investing

In theory, someone could put all of the money in Primary Health Properties. The FTSE 250 company has a yield of 7.63%. However, it’s not particularly diversified. If the business decides to cut the dividend, the yield could fall overnight.

Instead, I think it’s better to buy a handful of companies, to then average out the yield. That way, if something bad happens to one firm, the overall impact is much smaller.

Another point to note is the mix of stocks that can be targeted. There aren’t a dozen stocks with a yield of 7.6%. Instead, it can be made up of some solid, reliable divdiend payers such as Man Group. The yield of 4.81% is below the target, but it can be offset by including some higher-yield plays, such as Greencoat UK Wind, which boasts a yield of 10.49%.

Finally, it makes sense to distribute the £3k between different sectors. At the moment, renewable energy and financial services contain plenty of stocks with high yields. Yet if someone is too exposed to one area, it could spell problems even if they are holding multiple stocks.

Digging deeper

One example that could be included in the portfolio is HICL Infrastructure (LSE:HICL). The trust invests in core infrastructure assets, things like hospitals, roads, and schools. It essentially buys stakes in these projects and collects long-term cash flows in return. These contracts can span multiple decades, with a significant share from the government. There’s also built-in inflation linkage and relatively low volatility, which is exactly what income investors care about.

At the moment, the dividend yield is 6.44%, with the share price up 9% in the past year. Looking ahead, I’d say the outlook is positive. Infrastructure is in long-term demand globally. There’s a need for a huge amount of building related to trends like energy transition and digital networks. This could support long-term earnings and continued dividends for HICL.

On their website, HICL states that it targets a “sustainable dividend… fully cash covered and supported by long-term portfolio earnings“. The fact that the business has a clear focus on income payments makes it appealing. Of course, there are risks. Political and regulatory risks, especially in public-private partnerships, can negatively impact earnings. Further, if earnings don’t keep pace with distributions, the dividend could eventually come under pressure.

Even with these points, I think it’s a stock that could be considered as part of a FTSE 250 income strategy.

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Easter Monday (6 April) marks the start of the new ISA year, when a fresh £20,000 tax-free allowance kicks in. So the first trading day will be Tuesday (7 April).

But what level of passive income is on offer for someone looking to invest the full £20k at once? Let’s take a closer look.

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.

Passive investing

Some investors understandably don’t want the hassle of picking individual stocks. Instead, they invest in index tracker funds, which is the equivalent of holding the entire market.

This is a solid strategy for certain people. As John ‘Jack’ Bogle, the father of passive investing, once advised: “Don’t look for the needle in the haystack. Just buy the haystack“.

Investors who bought the UK’s equivalent of a haystack — the FTSE 100 — on 7 April last year have done very well. Over this period, the blue-chip index is up around 30%, with dividends on top.

Currently the FTSE 100 yield is 3.2%. So an investor parking £20k in something like the Vanguard FTSE 100 UCITS ETF would hope to get around £640 back in passive income.

Of course, dividend yields are never set in stone. Some Footsie firms could cut their payouts if the global economy nosedives.

Turning to the FTSE 250, where the returns haven’t been as strong in the past 12 months, the yield rises to 3.6%. So the income here could be a bit higher (£720 or so), assuming the UK economy isn’t battered by a prolonged Iran war.

Active investing

Alternatively, an investor could take on more risk by researching individual shares that offer above-average dividend yields. And there are plenty of those about across London today.

For example, the portfolio below yields 7.14%, and would therefore generate around £1,428 from £20,000 split evenly between the five stocks. This is based on their trailing yields, which might not be the same moving forward (dividends might go down as well as up).

Infrastructure income

Zooming in on HICL Infrastructure, this looks quite an attractive FTSE 250 stock. After tumbling 24% in three years, the yield has risen to 7.1%.

Infrastructure funds are sensitive to interest rate changes. So if the Bank of England hikes rates, the share price might come under further pressure.

Operationally, however, the trust is doing well, with management reiterating confidence in paying its dividend target of 8.35p for the year ending today (31 March). And 8.5p for the forthcoming year. This gives yields of 7.1% and 7.2%.

HICL recently disposed of its stake in the A63 Motorway in France, its second-largest portfolio asset at 8.4%. Encouragingly, this was sold at a 21% premium to its last calculated valuation in September.

Then yesterday, HICL announced it was upping its stake in Cross London Trains by around £52m. It expects this to add more than 1p to net asset value (NAV) per share upon completion.

I think HICL, which is trading at a massive 24% discount to NAV, is worth checking out for high-yield income.

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What’s more, you don’t have to be Scrooge McDuck to get started. Even a relatively small amount like £7,000 can do the trick. Here’s how.

Dividend yields

To generate £500 in passive income every year from £7,000, a dividend stock would have to yield just under 7.2%.

Unfortunately, it’s not possible to get anywhere near that sort of return from a FTSE 100 index tracker because the index currently only has a 3% yield. This is because the UK’s blue-chip index has been on fire recently, and this has lowered the yield.

So, to achieve higher income, an investor would have to deploy a stock-picking strategy. That is, selectively investing in the shares of individual companies rather than settle for the safety blanket of an index.

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.

A 7.2% yielder from the FTSE 250

The good news is that the FTSE 250 has a fair few high-yield stocks today. And one that stands out to me is HICL Infrastructure (LSE:HICL).

As the name suggests, this is an infrastructure-focused investment trust. It has stakes in essential public infrastructure projects, including hospitals, railways, and energy networks. From these, it earns steady, long-term payments which it uses to pay dividends to shareholders.

As we can see though, the share price has fallen roughly 32% over the past five years. This reflects the higher interest rate environment, which has impacted the sector. For example, borrowing to fund new projects has become more expensive.

If rates don’t fall as fast as expected (or if inflation spikes and they start rising), the share price could fall even further. This is a key risk.

However, I think the potential reward is worth considering here. Because the forecast dividend yield for the next 12 months is 7.2%, which if met would result in £500 from a £7,000 investment.

Crucially, management is confident the dividend will be met due to solid cash generation from its assets. Top holdings like Affinity Water (the UK’s largest water-only/non-sewerage company) and London St. Pancras HighSpeed (formerly known as High Speed 1) are performing well.

Currently, HICL is trading at a massive 25% discount to its underlying net asset value. To try and narrow this gap, the trust is using proceeds from a series of disposals to buy back shares.

I think investors should consider buying HICL shares to lock in that 7.2% yield.

Diversification

For our purposes here, I’ve just used a single stock as an example. In reality though, it can be dangerous to pile into just one company. It might, say, run into operational difficulties or rising competition could squeeze profit margins. And this may imperil the dividend.

To reduce this risk, it would be a smart move to buy a handful of shares from different sectors. It certainly helps me sleep better at night knowing my portfolio isn’t just a single stock!

But that doesn’t mean one has to necessarily sacrifice high-yield passive income. There are dozens of stocks across the UK market right now offering yields in the 6% to 8% range.

The post Here’s how to invest £7,000 in an ISA for a £500 passive income appeared first on The Motley Fool UK.

Being an active investor

An ISA has an annual subscription limit of £20k. However, this is still plenty to feel a noticeable difference in yield pickup from either holding cash or using an index tracker. One immediate benefit is that dividends received from an ISA aren’t subject to tax. As a result, the investor can receive the total gross dividend amount without losing any, effectively boosting the net portfolio yield.

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 next factor is based on active stock picking. After all, there are currently 28 stocks yielding 7% or more in the FTSE 100 or FTSE 250. This means that I’d be confident in picking a diversified selection of companies from this mix, enabling the overall yield of the ISA to be 7% or higher.

It’s true that some of the shares in this mix have double-digit yields that do look quite risky. However, there’s enough for an investor to avoid clear outliers that don’t look sustainable. Further, by including a dozen or so in the ISA, even if one company does cut the dividend in the future, the overall impact is limited.

If someone can invest £1,666 each month to fully take advantage of the £20k limit, it can quickly compound. In year five, the income alone could work out to be £621 a month. Of course, some might not be able to afford to invest that much. That’s fine. The main point is that using an ISA for any amount can be more tax-efficient, along with an active stock selection strategy.

A defensive pick

One stock that could be considered is HICL Infrastructure (LSE:HICL). The stock is up 7% in the last year, with a current divdiend yield of 7.06%.

HICL generates cash primarily from its infrastructure assets. These are mostly structured via long-term contracts with public sector counterparties. As a result, it provides the business with fairly predictable, growing income streams over time, which is good for dividends.

Importantly, the company doesn’t try to stretch the income payments too thin. For example, the dividend cover ratio is 1.1, which means the current earnings per share can fully cover the dividend.

Another reason to like the stock is that, despite the current geopolitical uncertainty, core infrastructure is a defensive area. Essential services like healthcare facilities and transport are less cyclical (and exposed) than broader equities. In my view, this should give income-oriented investors comfort.

In terms of risks, the stock has traded well above the net asset value (NAV) of the portfolio for several years. From the last report, it was almost a 25% discount. This could indicate that investors don’t have a lot of optimism around the company.

Overall, I think it’s a good stock for investors to consider to try and help hit the 7% annual target.

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Key details

I’m talking about HICL Infrastructure (LSE:HICL). The FTSE 250 investment company focuses on owning and managing core infrastructure assets. These are essential real assets that underpin sectors including transport, utilities, renewable energy and communications. These feature a mix of public-private partnerships, such as hospitals and schools, alongside fully private-funded options, such as student housing.

Over the past year, the stock’s down a modest 3%. The dividend yield is 6.8%, making it well above the average yield for the FTSE 250. With a share price of 121p, this means that each share purchased provides just over 8p worth of dividends on an annual basis. Therefore, let’s assume an investor bought 10,000 shares of HICL. This would cost £12,100. Factoring in the current dividend yield would mean that over the next year, it could pay £822 in dividends.

Going forward, an investor could take the money received and reinvest it. Assuming the dividend yield stays the same, this would mean that in year five, the dividends received could grow to £1,113. This shows the power of compounding money over time.

Looking to the future

One of the main assumptions when projecting future dividends is that the company will continue to pay out. Unfortunately, this isn’t guaranteed. It mostly depends on the financial success of the firm. If HICL performs well, it’s logical to think that some of the earnings will go towards the dividends.

Fortunately, I think the signs for the future are positive for HICL. The management team recently reconfirmed the dividend guidance through to early 2026.

The annual report said: “The further increase in dividend growth reflects continued improvement in cash generation from the portfolio in the year with cash cover of 1.56x.” This means the dividend being paid is easily covered by cash balances.

Further, the stock should benefit as markets anticipate more interest rate cuts. The infrastructure assets offer predictable long-term cash flows. This becomes increasingly attractive to investors who are looking to move cash that’s not earning as much into alternative assets like stocks.

One risk is that some assets operate under long-term government contracts or regulations. Therefore, policy changes, funding cuts, or political intervention could reduce returns.

Even with this concern, I think it’s a stock for investors to consider, especially for those who are looking to build a second income. It can play a role being included in a dividend portfolio with other shares.

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I’ve got my eye on three elite FTSE 350 dividend stocks that appear well-positioned to outperform in the next big bull run. Here’s why they’re worth considering today.

HICL Infrastructure

FTSE 250 investment company HICL Infrastructure (LSE:HICL) is first on my list. It offers a mighty 7.1% dividend yield.

The firm’s portfolio covers many essential public assets, with 65% concentrated in Britain. Examples include rail links, water treatment facilities, and hospitals. Infrastructure companies often benefit from lower interest rates since investors look for other stable, long-term opportunities when bond yields slump.

Having fallen 31% over five years, HICL Infrastructure’s share price trades at a 25% discount relative to the portfolio’s net asset value. If the gap narrows in a kinder macroeconomic climate, shareholders could enjoy a greater total return than the portfolio implies.

This opportunity should be weighed against low dividend cover of one times forecast earnings. Ideally, I’d want this to be twice as large for a comfortable margin of safety. However, a bumper yield and inflation-linked cash flows make the risks tolerable in my view.

Persimmon

The next dividend share to consider is FTSE 100 housebuilder Persimmon (LSE:PSN), which has a healthy 4.5% yield.

As borrowing costs for projects fall and mortgage affordability improves, homebuilder stocks could reap the rewards. Major planning reforms presently working their way through Parliament should also provide additional support to the sector. In this context, there are good reasons to believe the Persimmon share price can keep building on its 15% gain in 2025 thus far.

A stagnant UK economy remains a key risk for the company, especially if it translates into suppressed demand for new homes. In addition, unanticipated inflationary shocks can’t be ruled out, which could put pressure on margins.

But the positives shouldn’t be overlooked. Persimmon’s balance sheet is debt-free, providing robust support for the dividend. Moreover, a considerable land bank means it’s primed to capitalise on any long-term benefits from the government’s housebuilding drive. I reckon the budding recovery in Persimmon shares could have legs.

Sainsbury’s

My final dividend idea is another FTSE 100 share. Supermarket group J Sainsbury (LSE:SBRY) offers a tasty 4.9% yield for investors to chew over.

Sainsbury’s is holding its own in a cutthroat sector. In its FY25 results, the supermarket delivered its largest market share gain in a decade. Additionally, a 4.2% rise in sales to £26.6bn shows business is ticking along nicely. Shareholders will also benefit from a £200m share buyback and a £250m special dividend this year, bolstering the investment case.

Competition risks are the stand-out threat. German discounters Aldi and Lidl are pursuing a UK expansion drive, and ASDA’s ramping up a price war to attract customers away from its rivals.

Nonetheless, the board had sufficient confidence to restate its guidance for this year. Expected underlying profit of £1.1bn would match last year’s figure, and anticipated free cash flow above £500m should give passive income seekers a reason to be cheerful.

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Healthy dividend cover

The first one is the Octopus Renewables Infrastructure Trust (LSE:ORIT). The trust invests in a range of renewable energy projects, including wind and solar plants. It also has exposure to energy storage systems.

It makes money via the infrastructure it invests in, such as by selling the energy to consumers. This creates good cash flow, which then can be used to pay out dividends to investors.

Over the past year, the share price has fallen by 24%. Part of the reason for this is “challenging macroeconomic conditions”, which the management team flagged in the half-year report. This includes interest rates staying higher for longer, causing new debt to be more expensive to fund projects for Octopus.

However, the dividend cover is at a healthy 1.33 times, meaning that the current earnings per share easily cover the dividend payments. Further, there are exciting new initiatives set to start shortly, including a new power purchase agreement with Sky UK starting in April. These should help to boost revenue in the coming year.

The dividend yield of 8.76% is very attractive. Although the risk of interest rates staying elevated for 2025 remains, it’s clear that the company has been able to deal with this in 2024.

Diversified infrastructure exposure

A second company for investors to consider is HICL Infrastructure (LSE:HICL). The stock provides investors with exposure to a diversified portfolio of essential public and private infrastructure assets. These include hospitals, schools, and transport networks.

It makes money by having long-term contracts with government entities, local authorities or private operators. The income received from these contracts provides the cash flow to pay out to shareholders. To this end, the current dividend yield is just below 7%.

It’s true that the share price is down 14% over the last year. This is one factor that has pushed up the yield. The drop can partly be explained by a fall in the valuation of the assets in the portfolio. As the share price should closely track the net asset value of the portfolio, this makes sense. This remains a short-term risk for investors this year.

Investors might find this infrastructure stock appealing not only because of the high yield but also due to the diversified portfolio. It has exposure to a wide variety of projects, as well as different clients. This should protect it against a black swan event in one particular area.

Overall, both income stocks could be attractive for dividend investors to contemplate including going forward.

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Recent gains mean the average yield on FTSE 100 stocks has dropped to 3.5%. The corresponding reading for FTSE 250 shares, meanwhile, has slipped to 3.3%.

I think I can do better than this, and am looking at the following three FTSE 250 stocks to turbocharge my passive income. Their market-beating dividend yields and dividend growth projections can also be seen below.

A £1,600 second income

The average yield for these shares comes in at a mammoth 8%. If broker forecasts prove accurate, a £20,000 lump sum invested equally across these stocks would give me a £1,600 passive income over the next 12 months.

I’m confident that they will provide a steadily rising dividend in the coming years, too. Here’s why I’d buy them if I had spare cash to invest today.

Power up

Renewable energy stock NextEnergy Solar Fund could be considered by investors seeking reliable dividend income. That’s even though keeping solar panels up and running can be expensive, earnings-denting business.

The fund can expect revenues to remain stable regardless of economic conditions. Electricity demand remains broadly unchanged even during downturns, after all.

On top of this, NextEnergy Solar receives UK government subsidies that are linked to inflation, which in turn provides cash flows with added protection.

I think the company could be a great way for investors to capitalise on the green energy revolution.

Banking star

Investing in Georgia today is riskier than it’s been for many years. The unfolding political crisis in the country threatens to undermine the country’s bright economic outlook.

But on balance, I think the risks of such turmoil are baked into Bank of Georgia’s rock-bottom valuation. Today the bank trades on a forward price-to-earnings (P/E) ratio of just 3.7 times.

With it also offering that near-6% dividend yield, I think Bank of Georgia offers terrific value right now.

This is another FTSE 250 share with considerable growth potential, in my opinion. Regional rival TBC Bank‘s near-16% profits jump last quarter (as announced last week) illustrates this point.

Property giant

HICL Infrastructure mainly invests in public sector-related assets. This leaves it vulnerable to changes in government policy and legal changes.

But, I believe it’s another great way to achieve a reliable passive income. The contracted rents it receives from its portfolio of 100+ assets provides a steady stream of revenue that it can then distribute to shareholders.

HICL’s focus on key infrastructure like hospitals, schools, railways, and roads provides another layer of strength. These assets remain in high demand at all points of the economic cycle.

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Can I diversify my portfolio with these smaller companies, and still generate passive income? I think these two stocks could be the answer.

A FTSE 250 investment company

The first stock I’d buy is the £3.4bn investment company HICL Infrastructure (LSE: HICL). It specialises in making investments in core infrastructure projects primarily in the UK, but also within the eurozone and the US. HICL’s investment proposition aims to deliver long-term and sustainable income from its portfolio, which makes it a strong contender for generating passive income.

I particularly like HICL due to the diversification it can bring my portfolio. It offers something different from the more typical financial services, mining and energy stocks that are big dividend payers in the FTSE 100. For example, HICL shows on its website that its infrastructure investments have provided access to healthcare facilities for more than 10m people. Its portfolio is diversified across defensive sectors such as education and transportation too.

HICL also hasn’t missed a dividend payment since at least 2008. I think this shows the company’s infrastructure investments are critical to a functioning economy. Dividends are also paid quarterly, which is an added benefit to support my passive income stream.

Analysts are forecasting a dividend yield of 4.7% for 2022. This is a very respectable yield for my portfolio. However, there’s been little growth in the dividend over recent years. There’s no growth forecast in 2022 either. On top of this, the share price was extremely volatile during the Covid-related sell-off, which is something I have to keep in mind.

On balance though, I’d buy this FTSE 250 stock to generate passive income.

A slightly more unusual stock for passive income

The next company I’d consider for passive income is Greggs (LSE: GRG). It might not be the first choice in the FTSE 250, simply because the dividend yield isn’t the highest. Nevertheless, it has other attractive characteristics.

First, the forward dividend yield isn’t that low in my view. Analysts are forecasting a yield of 2.1% in 2022. I think this is respectable income for my portfolio.

The biggest draw for me, though, is the potential for dividend growth. Indeed, Greggs is expected to grow its dividend payment by 18% in 2022. There’s a good chance that this growth will continue in the years ahead. In this regard, I was encouraged by the trading update released just this month. Full-year results are now expected to be ahead of previous expectations, with the company saying there are “attractive opportunities to invest for growth”.

However, with Greggs, there’s a risk that these opportunities don’t work out. This would be detrimental to any future dividend growth and then impact my passive income stream.

So, in summary, I view HICL and Greggs as two FTSE 250 stocks with attractive income potential in the years ahead. Greggs should be able to grow its dividend over time, and HICL offers the more dependable and higher yield today.

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Looking on the bright side, I think this reversal presents an opportunity to pick up some choice bargains. Indeed, the following two FTSE 250 shares offer dividend yields I believe are too good to miss following recent share price falls. Here’s why I’d buy them today.

An all-round FTSE 250 bargain

There’s a lot I like about ContourGlobal (LSE: GLO) today. For one, I believe it offers jaw-dropping value in terms of both earnings and income. City analysts think the power station operator’s earnings will rocket 345% in 2021.

This results in a mega-low forward price-to-earnings growth (PEG) ratio of 0.1. A reading below 1 suggests that a stock could be undervalued.

Meanwhile, ContourGlobal offers a dividend yield that makes mincemeat of the FTSE 250 forward average of 1.9%. For 2021 this clocks in at a mammoth 6.7%.

I also really like the defensive nature of ContourGlobal’s operations. Electricity is one of life’s essential commodities and the business plays an essential role in providing this. I’m also a fan of the company’s broad global footprint. This gives it exposure to fast-growing emerging markets where energy demand is poised to boom.

Finally, I think ContourGlobal’s decision to concentrate on renewable and low-carbon thermal energy will pay off handsomely as the green revolution clicks through the gears. Though project delivery problems are an ever-present threat — the construction of power plants is a highly complex process, after all — I still think the risk-to-reward profile of ContourGlobal is highly attractive.

A property powerhouse I’d buy today

HICL Infrastructure (LSE: HICL) doesn’t carry dividend yields as large as ContourGlobal. Its 5.1% yield however still packs a hell of a punch. And like the electricity generator, it has exposure to non-cyclical sectors that provide reliable revenues, whatever the weather.

HICL Infrastructure is an investment company which ploughs money into essential infrastructure projects. These include highways, hospitals, railways and schools, the sort of critical assets which produce a steady stream of income and robust cashflows.

The assets it buys up are located both in the UK, on mainland Europe and in North America too. This provides it with added strength through geographical diversification.

There’s always the possibility that HICL Infrastructure could overpay to acquire an asset, or that a project it picks up might fail to deliver on its initial promise. This could result in significant reputational damage that might, in turn, negatively impact the share price.

But I’m impressed by the company’s track record on this front and its proud history of delivering decent shareholder returns. Like ContourGlobal, I think the property powerhouse is a great FTSE 250 dip buy.

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