Targeting a high yield, managing risk

One way to achieve this goal would be to invest a regular amount each month via an ISA. The benefit of the ISA is that any income received from dividends isn’t taxable. This means that all of the dividends can be reinvested back in stocks. In turn, this should help the portfolio to compound gains at a faster pace.

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.

An investor can currently put £20k a year in an ISA tax free. This works out at £1,666 a month. I think it makes sense to invest each month. Yet for cash flow reasons it might be easier for someone to invest less frequently, such as once a quarter.

Whatever the frequency, the main strategy idea is built around picking 75% core dividend shares, with 25% in higher risk (but higher-yielding) options. This can help to boost the overall yield of the portfolio significantly, without increasing the overall risk that much. For example, if 75% of the stocks yielded 5% but 25% yielded 10%, my average is a very respectable 6.25%.

A property income share

One high-yield stock option to consider is Real Estate Credit Investments (LSE:RECI). The stock currently has a dividend yield of 9.72%, with the share price down 2% over the past year.

The company invests and manages a portfolio of real estate debt, mostly focused on Europe. The debt’s secured by commercial or residential properties, so the risk level’s lower than if the debt was unsecured.

One of the key aims of the fund is income, with the business paying out a regular quarterly dividend. This has been a stable 3p per share, paid each quarter for many years. Given the nature of operations, I think this is sustainable going forward.

It’s true that a debtor default is a risk. Whenever anyone buys debt, it comes with the risk of the original loan not being fully repaid. Yet given that property is secured against these deals, I feel the risk’s manageable.

The numbers

If someone invested the full ISA allowance each month and built a portfolio with an average yield of 6.25%, things could grow quickly. After 11 years, the portfolio could be worth just under £320k, which would mean in the following year it would provide over £20k in dividend income.

Of course, these are just forecasts. Trying to predict income payments a decade into the future isn’t an exact art by any means! But by making use of high-yield dividend shares and the ISA benefits, an investor can certainly aim high.

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The real deal

One stock I’d look to include in my portfolio would be Real Estate Credit Investments (LSE:RECI). The stock is down 13% over the past year, with a current dividend yield of 10.39%.

The business invests in real estate debt secured by commercial or residential properties in the UK and Europe. Therefore, it differs from a real-estate investment trust (REIT) in that it doesn’t own the properties, but rather helps to fund purchases of them.

The dividend yield is very high, with regular quarterly income payments. Of course, with a yield this high, there must be risk involved. This is the case, investing in debt in the property market right now can be difficult! Property developers are struggling under the burden of high interest rates. Some are going bust because they can’t afford the repayments. If enough go bust that are within the fund, it could really hamper performance.

Based on the track record, I think the management team that runs the fund can navigate these murky waters. If interest rates fall, this will certainly help the share price to recover as sentiment improves.

Banking on success

Another example I’d buy if I was starting out would be TBC Bank (LSE:TBCG). I recently wrote about the stock from the angle of capital gains, but it equally applies when thinking about income potential.

The stock has rallied by 38% over the past year but also boasts a dividend yield of 6.8%. Better financial results not only help to increase the share price but also provide more earnings that can be paid out as dividends.

The Georgian bank has benefitted from higher interest rates, enabling it to record a larger net interest margin. Further, the Georgian economy grew by 6.8% in 2023. So there was a greater level of general spending and lending activity for the bank to get involved in.

One concern is that the stock now trades at £31. This is high for a FTSE 250 firm and can make it unattractive for potential investors. If I was only looking to allocate a small amount of money, I wouldn’t get many shares of the company.

Checking the numbers

The average dividend yield of both stocks combined is 8.6%. I’d want to include other stocks in my portfolio to reduce the risk from just these two ideas. But let’s assume I could build a portfolio with this same yield.

If I invested £300 a month, after 15 years I’d have an investment pot that could be worth just over £110k. In the following year, this could pay me out £9.5k in passive income.

Of course, I’d need to reinvest my dividends along the way to help compound growth. There’s the risk that my pot might grow at a slower rate, taking longer to reach my goal. Yet it highlights how this strategy can be very profitable.

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Neither of these payouts were cut last year and both are expected to remain safe. Indeed, one of these companies is expected to increase its payout significantly this year.

Better than gold?

FTSE 100 gold miner Polymetal International (LSE: POLY) operates in Russia and Kazakhstan. It’s the largest gold stock listed on the London market and has one of the most generous dividends.

The gold price has pulled back from last summer’s record highs of more than $2,000 per ounce. But, at $1,800 per ounce, the yellow metal is still worth around 10% more than a year ago.

A strong market is naturally good news for gold miners. Polymetal’s management has been doing its best to take advantage of this situation. Production rose by 4% to 1.5 million ounces last year. Some spending was also brought forward to take advantage of market conditions and avoid any disruption due to Covid-19.

Low costs mean the group benefited from a 40% operating profit margin during the 12 months to 30 June. Forecasts suggest this could rise to 50% for the 2020 calendar year, supporting strong cash generation.

Brokers expect a dividend of 87p for 2020 and 123p for 2021. This gives Polymetal a forecast dividend yield of around 6% for 2020 and more than 8% for 2021.

A safe dividend share?

Of course, these bumper payouts rely on the price of gold remaining high. There’s no way to predict how likely this is. Gold is often seen as a safe haven trade in troubled times, so one possible scenario is that the gold price will slump as the world returns to normal after the pandemic.

I view Polymetal as one of the more speculative dividend shares in my portfolio. But the company has a good record of returning surplus cash and Polymetal’s profits don’t depend directly on an economic recovery.

8% income from property

My second stock is a little more unusual. Real Estate Credit Investments (LSE: RECI) is a property finance company with a market-cap of around £330m.

The firm provides loans secured on a mix of property in Western Europe. According to the company’s January update, its largest holdings include an apartment complex in Lisbon, an office development in Paris, and care homes and hotels in the UK.

In total, RECI has 58 loans secured against a portfolio valued at £380m.

There are obviously some real risks here. Many of the properties on which RECI has secured loans will have been affected by the pandemic. Although the company said in January it had “no concerns” about the creditworthiness of these positions, in my view, repayment problems could still emerge. This would hit the share price.

I see RECIE as a pure dividend share. Management has said it intends to maintain the 12p per share dividend, giving a yield of more than 8%. I’m happy with that cash income, but I don’t expect this payout to grow for the foreseeable future. That means the share price may not rise much either.

The post 8% yields: 2 dividend shares I’ve bought for my ISA appeared first on The Motley Fool UK.