A Stocks and Shares ISA is a brilliant vehicle for generating a second income from top UK shares as all returns are tax-free for life.
Every year, we can invest up to £20,000. If mine was empty, I’d want to start filling it up right away. I reckon now is a brilliant time to buy high-yielding FTSE 100 dividend shares at low prices.
I snapped up the following four dividend stocks in a recent shopping spree. I’m already ahead on all four and I haven’t received a penny in dividends yet.
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A great time to buy shares
My first pick was mining giant Rio Tinto. It looks cheap trading at just over eight times earnings (15 times is usually seen as fair value). Its forecast yield is 6.5%, covered 1.7 times by earnings.
Wealth manager M&G offers one of the biggest yields on the entire FTSE 100. It’s forecast to pay income of 9.93% this year and a thunderous 10.1% in 2024. I’m normally wary of super-high yielders. However, I reckon this might just be sustainable. So I bought it last month. Its share price could rise too, if the stock market rebound continues.
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The same applies to another June purchase, insurer and fund manager Legal & General Group, which is forecast to yield 8.8% covered 1.4 times by earnings. It’s going cheap at 6.1 times earnings.
I’ve just topped up my stake in Lloyds Banking Group, which looks set to yield 6.1% covered 2.7 times by earnings. Another cheapo, markets value the stock at 6.3 times earnings.
I’ll buy my fifth and final high-yielder in the next few days. High interest rates are weighing on housebuilder Taylor Wimpey but it looks unmissably cheap to me at 6.1 times earnings. Better still, the stock should yield a superb income of 7.8% this year. That dividend is covered just once, however, which makes me a little suspicious.
My income should rise over time
These are tremendous rates of income. As ever, they’re not guaranteed. In fact, Rio Tinto cut its dividend earlier this year. If inflation and interest rates stay high as the economy continues to struggle, others could potentially follow.
My favourite five FTSE 100 stocks would yield around 7.52% this year. If I invested £4,000 in each, I’d fill up my empty ISA and generate income of £1,504 in year one. With luck, I’ll get share price growth on top.
I only buy shares with a minimum five-year view. Ideally I’d like to hold them for 20 years or more. History shows that over this term, the FTSE 100 has delivered an average total return of 6.89% a year.
Let’s say my portfolio matches that (I’m hoping for a better return, to be honest). After 20 years, I would have £75,818. And let’s say I started taking my income as dividends at that point and the average yield was still 7.52%. In that scenario, I’d have a second income of £5,701 a year for life. That’s not a bad return from my original £20k.
That’s just one year’s ISA allowance. In practice, I’d try to load up an ISA every year. These things are meant to be full, not empty.
