A Stocks and Shares ISA can be an excellent way to earn tax-free dividend income. It’s certainly my first point of call when investing my money.
There are thousands of shares that I could buy in an ISA depending on my strategy. Currently, I own a variety of both growth and dividend stocks.
But for regular and steady income, it’s the dividend shares that shine.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
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.
My Stocks and Shares ISA
If I had £20,000 to invest in a new Stocks and Shares ISA, this is how I’d approach it today to maximise regular income. First, I’d aim to own a basket of ten stocks, so I’d look to invest £2,000 in each one.
By doing so, I’d spread the risk and avoid putting all my eggs in one basket. Diversifying my shares across several stocks like this should protect me if one or two of the companies faces significant challenges.
There’s also a reason why I wouldn’t own hundreds of stocks too. I’d consider this to be over-diversification. By doing so, it would also raise transaction costs and my time needed to follow each company.
How I’d filter
Next, I’d search for stocks to buy. It can often be a minefield looking for the optimumal set of companies to invest in. But it doesn’t need to be difficult.
Keeping it simple can still lead to lucrative results, in my experience.
For instance, by filtering UK shares by a set of characteristics, it can narrow down my options.
As I’m looking for the best dividend stocks, companies don’t need to be growing sales or earnings particularly fast. Mature businesses with steady and stable profits are what I’m looking for.
Finding stocks to buy
To find a basket of 10 stocks, I’d just focus on the FTSE 100. There are plenty of mature companies that suit this style in this large-cap index.
Next, I’d ignore any stock that offers less than a 3% dividend yield. For an income portfolio, I want to aim for considerably more.
There’s more to dividend stocks than just the yield though. Ideally, my top picks have sufficient earnings to be able to afford paying out income to shareholders. To ensure this, I’d look for a dividend cover that’s greater than 1.2.
Finally, there’s much to be said about dividend history. In essence, companies that have been paying out dividends for over a decade could continue to do so. Although, bear in mind that payments are never guaranteed.
By using these criteria, the universe of shares that I can pick from is reduced to just 27.
My top selection
Right now, if I had spare cash for this strategy, I’d buy BP, HSBC, Land Securities, Sainsbury (J), SSE, Imperial Brands, Burberry, Phoenix Group, Rio Tinto, and Schroders.
On average, this selection offers a 6% yield, a dividend cover of two, and 25 years of consecutive payout history. That all sounds splendid to me.
Bear in mind that despite how good they look, I’d still need to keep an eye on them over the coming years. Overall though, I’d happily add them all to my Stocks and Shares ISA for reliable and regular income in 2024 and beyond.
