I have been thinking about how to increase my passive income streams. If I had £20,000 in my Stocks and Shares ISA at the moment, here is one way I would consider investing it to try and earn dividends.
I would diversify evenly across eight different shares, reducing my risk by limiting exposure to any one business sector.
Financial services
Right now a lot of financial services firms trade on what look like cheap valuations. I think that reflects some of the risks – a worsening economy could lead to lower profits for such firms. In the long run, however, I think there will be robust demand in this sector.
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Among financial shares for my ISA, I would pick fund manager M&G with its 9.2% yield. I would also buy insurer Direct Line, which currently yields 9.1%. Both benefit from strong brands, established customer bases, and long experience in their key markets.
Tobacco
Tobacco is a popular sector among income investors. The industry tends to throw off large cash flows, with limited need to reinvest in the business. Manufacturing costs are low, but the product can support premium prices.
All of that helps to fund juicy dividends. I would buy British American Tobacco, yielding 6.3%, and the 9.0%-yielding Imperial Brands. Both face the same risk – that declining cigarette usage in many markets will hurt revenues and profits. They are responding in different ways. British American is aggressively moving into non-cigarette products, while Imperial is milking cigarettes as a cash cow for the coming years.
I think both strategies could help support meaty dividends. I currently own both shares in my Stocks and Shares ISA already and would consider buying more.
Housebuilding
Another sector facing risks to revenues and profits in coming years is housebuilding. A housing market fall is definitely a risk to consider. Then again, short supply means housing demand may hold up well. Builders continue to report strong sales pipelines.
I would buy Persimmon, with a 12.2% yield, and Taylor Wimpey, with its 7.1% yield. They continue to perform well and have strong positions in the market. Even if a housing market fall does lead to lower dividends at some point, there is a possibility the companies could still pay out a reduced but attractive amount. Persimmon, for example, could halve its dividend yet still have a higher yield than most FTSE 100 companies.
Consumer goods
Finally I would buy consumer goods manufacturer Unilever for its 4.0% yield, along with 4.3%-yielder Tesco.
These companies sell items used in everyday life, from soap to food. So I expect demand to remain robust. I also think both have a competitive advantage: Unilever in its brand portfolio and Tesco with its estate of stores across the UK. Shoppers tightening their belts may hurt revenues and Tesco is seeing evidence of this in-store. But each firm’s competitive advantage could help it stay profitable.
Investing my Stocks and Shares ISA
Splitting £20,000 evenly across these eight shares would hopefully generate around £1,530 of annual dividends. I think that could be an attractive passive income for me both now and in years to come.
