How might I invest a £20,000 Stocks and Shares ISA allowance in dividend stocks right now?
Even if I don’t have that much, just thinking about what I could earn helps move me to invest the most I can.
Dividends are often similar across a sector. But I think we need to dig more. Insurance firms are on some big dividend yields. But is Legal & General the same as Direct Line?
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!
Sector valuations
Direct Line is on a price-to-earnings (P/E) ratio of six by 2025. And its yield would rise above 10% by then. The P/E for Legal & General is also under six for the same year. And the dividend is around 9.5%
Direct Line insures things, mostly cars (which make up half its premiums). Legal & General though, does investment funds, asset management and other finanical services.
Same sector, similar valuations, but the two are quite different. And other sectors, like banking, are similar.
Safe bank?
Barclays is on a P/E of under five. That looks to be based on fears of bank failures, like the ones we saw this year in the US.
But UK banks are well regulated now, and just can’t stretch themselves the way some badly run US banks can. I think that makes UK banks good value now as their share prices are held back by global fears.
So I think we can choose a stock from a sector that looks good value even if general sector weakness might be valid. That means Legal & General, with its 8% yield, makes my picks today for a start.
And Barclays is in too, with a 4.6% yield. It’s not a big one, but forecasts show very strong cover by earnings. And it looks like it should grow in the next few years. Again, I think it’s less risky than the global sector.
Two more stocks
Now for the Investment Banking and Brokerage Services sector, and M&G and abrdn.
M&G works in the UK, with savings and investment services for retail customers. But abrdn is global, dealing with business clients. So there are real differences here too.
In this case, I do like both. But M&G gets the nod for its 9.8% dividend.
Finally, there often isn’t much to choose between stocks in the same sector, and I see that with tobacco. I’d pick British American Tobacco for its 8.7% dividend — a bit ahead of 7.9% at Imperial Brands.
Buy all four?
So what if I split £20,000 of ISA cash four ways, buying Legal & General, Barclays, M&G and British American Tobacco? That would get me average yield of 7.8%.
So from a £20,000 ISA, I could pocket around £1,550 per year. That’s if dividends won’t change, which they surely will. And I haven’t looked at the risks, which I would do first.
Check the risk
The main risk I see is that financial pressure could lead to the cash being cut. But this at least gives me an idea of what I might earn from dividend stocks.
So by looking past sectors and at individual stocks, I think we ISA investors can beat the big City folk.
