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Here’s how to invest £20,000 in an ISA for a 7% dividend yield

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UK income stocks typically offer a dividend yield of around 4%, on average. Yet multiple leading businesses in the FTSE 100 offer considerably more. And while not every high yield is sustainable, a few can greatly amplify an investor’s passive income stream.

With that in mind, and the Stocks and Shares ISA deadline just around the corner, how can investors establish a 7% yielding income portfolio in 2023?

1. Don’t solely focus on dividend yield

As strange as that sounds, looking solely at firms offering a 7% yield, or higher, can quickly lead investors astray. And it also creates opportunity costs. Apart from having a relatively short list of options, there may be far greater long-term income opportunities. Just because a business has a low payout today doesn’t mean it’s incapable of growing it in the future.

Therefore, priority should be placed on finding income stocks that generate excess free cash flow. Don’t forget dividends are merely a way for companies to return extra capital to shareholders. But that can only happen if there is extra money in the first place.

Firms that can maintain and expand their cash flows organically are a Dividend Aristocrat’s hallmark trait. These are companies that have increased shareholder payouts for more than 25 years in a row. And investing early along this journey can reap enormous dividend yields in the long term.

Just look at Warren Buffett’s initial investment in Coca-Cola in 1988. After 35 years of dividend hikes, the yield on his original cost basis is now 56.7%!

2. Diversify

Investing £20,000 with a Stocks and Shares ISA is more than enough capital to build a diversified portfolio. Buying shares in multiple businesses operating in different industries is paramount. Why? Because even the largest enterprises are susceptible to disruption both short-term and long-term.

Look at the 2020 pandemic as an example. Before Covid-19, plenty of travel stocks offered shareholders a steady income stream. But after the virus ravaged the world, these dividends quickly ran dry. And most are still struggling three years later to return to their former glories.

The impact of such disruptions can be mitigated by ensuring a portfolio isn’t concentrated in a single sector. In other words, diversification protects a portfolio’s yield.

Which FTSE 100 shares yield +7%?

By combining high- and low-yield dividend-growth companies, investors can easily hit their 7% income target. So let’s take a look at the FTSE 100 shares offering the most in March. But remember, investors need to investigate each thoroughly to verify these payouts are sustainable or, even better, expandable.

Name Sector Dividend Yield
M&G Financial Services 9.13%
Barratt Developments Home Building 8.19%
Taylor Wimpey Home Building 8.12%
Vodafone Telecommunications 8.08%
Phoenix Group Holdings Life Insurance 8.03%
Legal & General Life Insurance 7.69%
British American Tobacco Tobacco 7.42%
Rio Tinto Metals & Mining 7.26%
Imperial Brands Tobacco 7.13%
Glencore Metals & Mining 7.03%

The post Here’s how to invest £20,000 in an ISA for a 7% dividend yield appeared first on The Motley Fool UK.

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See the full investment case

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c., Imperial Brands Plc, and Vodafone Group Public. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.