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Many investors are looking for income from their investments. This isn’t surprising – with the cost of living at sky-high levels, a reliable stream of dividend income can offer a much-needed financial cushion. The good news is that it’s possible to create a nice little tax-free income stream from a Stocks and Shares ISA. Here’s a look at how to build one with a 6% dividend yield.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
High-yielding dividend stocks
There are many stocks on the London Stock Exchange with yields in excess of 6% today. So in theory, you could build an ISA with a 6% yield by buying just one stock, or perhaps a handful of them.
This wouldn’t be the smartest approach however. Because every stock has its own risks and share prices can (and do) fall.
If you only own one stock and its share price falls 30%, you’re going to be looking at disappointing returns even if the dividend yield on the stock is 10%. In this scenario, your overall return would be -20%.
Lowering risk with diversification
A better approach would be to spread your money over at least 15 different dividend stocks. This would reduce your stock-specific problem significantly.
If you own 15 different stocks, and a couple of them underperform, your ISA may not take much of a hit overall. Because the chances are, a few of the 15 will have done well over the same timeframe, offsetting any losses from the underperformers.
Selecting stocks from a range of industries (eg banking, insurance, utilities, industrials, etc) can also help to reduce portfolio risk. That’s because stocks in different industries tend to behave differently.
It can also pay to put a few ‘defensive’ dividend stocks in a portfolio. These might have lower yields than some other stocks, but they tend to be less risky, meaning they can offer portfolio protection.
A defensive income stock
A good example of a defensive dividend stock is UK gas and electricity company National Grid (LSE: NG.) People always need gas and electricity, no matter what the economy’s doing. That’s why this stock can be considered defensive – its revenues are unlikely to suddenly fall off a cliff.
For the current financial year (ending 31 March 2026), National Grid’s expected to pay out 47.9p per share in dividends. Given that its share price is 1,045p today, that puts its yield at about 4.6%.
That’s not the highest yield in the market. But if you combined this stock with a few others yielding more than 6% (eg Legal & General, Aviva, M&G), you could easily get an average yield of 6%.
Now, while this stock is defensive, it still has risks. For example, the company may need to spend more on its infrastructure than anticipated in the years ahead, putting pressure on profits.
Overall though, I think it’s a solid play for income. I believe it’s worth considering today.
