Different investors have a variety of investment objectives when it comes to their Stocks and Shares ISAs. One of the things I aim to do with mine is to generate passive income. Using the plan below, I could target £35 a week of passive income by investing £20,000 in UK dividend shares.
Annual dividend income over £1,800
The amount of dividend income I expect to receive depends on the average dividend yield of the shares in which I invest. If I put £20,000 into shares yielding 5%, I would hope for £1,000 in passive income each year. If I put £20,000 into shares yielding 10% on average, I would expect £2,000 in annual dividends.
Shares yielding 10% are rare. But the six UK dividend shares below come quite close, with an average yield of 9.4%. If I split £20,000 evenly across them, I would expect annual dividends of around £1,883. That is the equivalent of passive income of more than £35 per week, every week, next year – and beyond too, if I keep the shares and they maintain their dividends. That is not guaranteed, as high dividend yields often suggest at least some investors are wary of certain risks in a share.
Should you invest £1,000 in Direct Line right now?
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Dividend shares for my Stocks and Shares ISA
Two of the companies actually yield over 10% right now. First is gas producer Diversified Energy with its 10.5% yield. The company owns thousands of old gas wells in the US. By buying old wells it can get avoid exploration costs, but one risk is that the cost to cap such wells could eat into profits.
British housebuilder Persimmon offers a 10.6% yield. I like the company’s established business and attractive profit margins. If housing prices fall, that could hurt revenues and profits. But for now, Persimmon continues to perform strongly and a 30% share price fall in the past year has pushed up its yield.
In the financial services space, I would buy M&G and Direct Line, which both currently yield 8.6%. M&G is an investment manager. Its well-known brand enables it to attract and retain clients. Thanks to the size of the sums invested, this can be a lucrative business. It raised its dividend last year, as did insurer Direct Line. It also benefits from a strong brand, as well as resilient demand in the insurance market. One risk for both is a recession, which might cause clients to tighten their belts and shop for better deals from competitors. But I also think the firms’ strong brands could help them to build customer loyalty.
Another company that benefits from strong brands is tobacco maker Imperial Brands, which owns names such as Lambert & Butler. Tobacco is a highly cash generative industry. That helps support Imperial’s current dividend yield of 8.4%. Declining cigarette sales in many markets could hurt future sales and profitability, although the company hit an upbeat note in a trading update this week.
My final choice would be Income & Growth Venture Capital Trust. By investing in lots of young companies and sharing some of the profits as dividends, it yields 9.8%. The dividend could fall if performance in the companies the trust invests in disappoints. But it could also benefit from the upside of getting into success stories at an early stage.
