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Here’s how I’d use a £20K Stocks and Shares ISA to target a 7% dividend yield

Bearded man writing on notepad in front of computer
Image source: Getty Images

As February nears an end, we are just weeks from the annual contribution deadline for ISAs. I have therefore been thinking about what moves I ought to make in my own Stocks and Shares ISA.

If I had £20,000 to invest over the coming weeks, here is how I would do it to try and target a 7% average dividend yield. That could earn me £1,400 per year in dividend income.

Key investing principles

That 7% is a high dividend yield compared to the average, but I think it is achievable even when investing in blue-chip companies.

I would stick to a couple of important risk-management principles when investing, though.

One is diversification. Another is not letting the tail wag the dog. So instead of hunting for companies based on their high yields, I would search for great-quality businesses trading at an attractive share price. Only then would I consider their yield.

Going for income

But what sort of blue-chip companies have high dividend yields and solid-looking businesses that I think could continue to support their payouts?

Often they are found in mature industries with limited growth prospects. Tobacco is an example. FTSE 100 firms British American Tobacco and Imperial Brands yield 6.9% and 6.8%, respectively. I can own US firms in my Stocks and Shares ISA too. I am currently thinking about adding to my holding of the American Marlboro owner Altria. It has an 8% yield.

Another search area is industries that are out of fashion with investors. For example, fund managers seem to fit that description. Abrdn currently yields 7%, ahead of its final results tomorrow. It has cut its dividend before, though, and I see a risk that could happen again if business performance is weak. No dividend is ever guaranteed.

Targeting great businesses

Doing this, I would build up a shortlist of shares. With £20,000 I could diversify by splitting the money equally across five to 10 shares.

I would be sure to spread my investments among different business sectors. While a lot of financial services firms have attractive yields right now, that could be because the City thinks there might be dividend cuts ahead. I think the same is true of the housebuilding sector at the moment.

As long as my Stocks and Shares ISA is not too heavily concentrated in a single area, I can limit the risk I face if a sector has a big downturn.

I think a 7% yield is achievable in today’s market. As that is an average yield, I do not need all the shares in my ISA to deliver 7%. Some could be lower, but be balanced out by higher yielders.

Whatever choices I make though, the key thing is that I would never buy a share solely because of its yield. I would be hunting for great businesses at attractive prices. Hopefully taking that approach could help me avoid some yield traps.

The post Here’s how I’d use a £20K Stocks and Shares ISA to target a 7% dividend yield appeared first on The Motley Fool UK.

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C Ruane has positions in Abrdn Plc, Altria Group, and British American Tobacco P.l.c. The Motley Fool UK has recommended British American Tobacco P.l.c. and Imperial Brands 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.

Motley Fool UK 2023