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With the end of the tax year approaching, I’ve been thinking about how investors can make the most of their Stocks and Shares ISA. One idea? Use it to build a passive income stream from dividends.
By investing the full £20,000 allowance in a spread of FTSE 100 dividend stocks, an investor could generate a high income today that also rises steadily in the future. That’s tax-free inside an ISA, which makes it even more appealing.
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It’s ambitious, but not unrealistic. Plenty of FTSE 100 shares offer eye-popping dividend yields today.
How to get a high yield from the FTSE 100
Legal & General Group yields 8.74%, while British American Tobacco yields 7.62% and Land Securities Group pays 7.37%.
It’s important to remember that high yields can be risky. Just because a company pays a big dividend today doesn’t mean it always will. The board needs to generate enough money to maintain payouts. Also, a high yield may be a sign of a falling share price and a struggling business.
That’s why I believe in building a balanced portfolio across different sectors, helping reduce risk if one stock stumbles.
One dividend stock that stands out to me as worth considering is Taylor Wimpey (LSE: TW). The housebuilder currently yields a mighty 8.37%, and that’s forecast to rise to 8.56% next year.
The board says it’s “committed to a sustainable ordinary dividend that grows over time”, although, as I said, that isn’t guaranteed.
Housebuilders have had a bumpy ride. High mortgage rates and the cost-of-living crisis have dampened demand, while sticky inflation has driven up the cost of labour and materials.
Labour’s promise to build 1.3m homes in the next five years could also increase supply, impacting prices. Although I suspect it will undershoot that ambitious target.
The Taylor Wimpey share price has actually fallen 20% in the last 12 months, which is a blow. As someone who holds the shares, I’m expecting it will recoup that loss and more, once inflation is finally beaten and interest rates start falling.
I’m backing the shares to recover
Today, Taylor Wimpey looks decent value, trading at 13.8 times earnings. For me, this is a solid long-term buy-and-hold stock. But the shares could take time to recover.
I wouldn’t consider putting all of a Stocks and Shares ISA into one or two high yielders. Diversification’s key. Adding a fewer lower yielders such as Sainsbury’s (5.54%) and BP (5.42%) could give me balance. By investing future ISA allowances an investor could aim to hold a minimum of 12 different stocks over time, eventually upping that to around 15.
By putting £20,000 into a well-balanced ISA and targeting a 7% average yield, an investor would potentially get dividend income of £1,400 in year one. Which isn’t a bad start.
Over time, if companies increase profits and dividends, that income could rise and rise. Especially if the investor ploughs all of their dividends back into their portfolio while working, and only draws on them as income after they retire.
The key here is patience. Avoid chasing short-term gains. Instead, target a steady, tax-free income stream that grows over the years. For me, that’s the real power of a Stocks and Shares ISA.
