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How I’d invest £10,000 in a Stocks and Shares ISA to boost my income

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Like most people, I’m always looking for ways to boost my income. I’ve therefore been looking for some dividend shares to include in my Stocks and Shares ISA. If I was lucky enough to have a spare £10,000, I’ve identified three stocks that I’d buy.

What I’m looking for

Yield is important to me here. The yield on a particular stock is calculated by dividing the annual dividend by the current share price. A share with a high dividend yield is particularly appealing. However, it’s important to take a closer look at the reasons why certain shares are offering seemingly attractive returns to shareholders.

Take Persimmon as an example. Based on its 2022 dividend of 235p, the stock is currently yielding over 18%. But I wouldn’t buy shares in the UK’s largest housebuilder at the moment. That’s because the directors earlier warned that an expected downturn in the housing market meant the current level of dividend is unsustainable. Until I know more, I’ll be looking elsewhere.

I’m also keen to preserve capital. There’s little point earning healthy income if the share price falls significantly longer term. Nobody can predict the future with certainty, but by investing in quality companies with strong management, I should be able to see my initial stake grow.

According to research by AJ Bell, the FTSE 100 provided a dividend yield of 4.1% in 2022. I’d like to do better than this. Indeed, the stocks of many high-quality companies are currently offering far better returns.

My three picks

So, if I had a windfall of £10,000, which shares would I buy?

Firstly, I’d choose Rio Tinto. Assuming the final dividend of the year ended 30 June 2021 is maintained for 2022, the mining giant currently offers a yield of 9.8%.

Commodity prices can fluctuate making earnings volatile. That’s why the company has a history of paying special dividends. These are difficult to predict but the board has committed to returning at least 40% of underlying earnings to shareholders. With reasonably strong results for the first half of 2022, it seems likely that the yield will remain well above the FTSE 100 average.

BT would be my second choice. In November, the company released its half-year results, which showed an increase in both revenue and profit. The present level of dividend appears sustainable, giving a yield of 6.8%.

Finally, I would invest in M&G to boost my income.

The company manages investments for both individuals and institutional investors. It also provides savings and insurance products through its Prudential brand. M&G’s shares are currently offering a yield of 9.7%. Encouragingly, the annual dividend has increased during each of the last three years.

How much income could I earn?

By putting a third of the £10,000 in each of these companies, I could earn £877 in dividends in 2023. A return of 8.8% beats any savings rate offered by the banks. Investing in a Stocks and Shares ISA would also ensure that the dividends are tax free.

Of course, dividends are never guaranteed and all stocks come with their own risks, including those mentioned above. However, by investing in well run companies operating in established markets, the risk of a dramatic cut in shareholder returns can be mitigated.

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 post How I’d invest £10,000 in a Stocks and Shares ISA to boost my income appeared first on The Motley Fool UK.

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James Beard has positions in Bt Group Plc and Persimmon Plc. The Motley Fool UK has recommended Prudential 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