I’m a big fan of Stocks and Shares ISAs and I use part of mine to earn regular income from dividends. There are plenty lucrative investment opportunities around today, in my opinion, driven by recent events in the banking world.
It’s not exactly been a quiet time in banking. Over the weekend, Credit Suisse was taken over by UBS. The move came after the former suffered major financial difficulties. This followed the collapse of two US firms this month – Silicon Valley Bank and Signature Bank.
Uncertainty surrounding such failures and their knock-on effects caused the stock market to tumble in recent weeks. But is this an opportunity to pick up cheaper shares and lock in a juicy dividend yield? I reckon so.
In response to events, several global central banks led a coordinated action to stabilise the financial system. This could be enough to settle stock market jitters.
But several FTSE 100 dividend shares still offer attractive yields. For instance, my favourite income stocks right now are Phoenix Group, Legal & General, and British American Tobacco. And on average, they offer a forecast dividend of around 9%.
That’s enough to earn £900 of passive income from a £10,000 Stocks and Shares ISA.
If I had a spare £10k to devote to a new ISA, I’d snap up all three shares today and split my investment equally between them.
When looking for the best income shares, I wouldn’t just look at the yield though. Although it highlights a stock’s value, there are other considerations too.
What I look out for
A large dividend yield is no good if a company doesn’t have sufficient earnings to pay for it. That’s why I consider its dividend cover. This measure looks at how many times a business can pay its dividend from current earnings.
All three of my favourite shares listed above can comfortably afford to pay their dividends. On average, they operate with dividend cover of 1.5.
Next, I’d look at dividend history. A stock that has consistently paid dividends for many years could be more reliable than one that has only recently started doing so. That’s why it’s good to see my top three shares offer 24 years of back-to-back payouts.
As dividends are typically paid from earnings, I’d need to ensure I invest in sound businesses. Cash payments to shareholders aren’t guaranteed and they can be cut or suspended if earnings fall.
With Phoenix Group and Legal & General both operating in the financial sector, I have to bear in mind that their share prices could suffer in the short term if problems in the banking sector persist.
But as a long-term investor, I’m happy to look beyond near-term issues. I often think of Warren Buffett who coined the phrase: “Be fearful when others are greedy and greedy when others are fearful”.
Some of the best opportunities arrive in times of crisis and fear. And in these uncertain times, I want to make the most of my ISA.
With 9% yields for my favourite dividend stocks, with spare cash I’d pull the trigger on all three.
The post How I’d invest £10k in a Stocks and Shares ISA to earn £900 of passive income appeared first on The Motley Fool UK.
Harshil Patel has positions in British American Tobacco P.l.c. The Motley Fool UK has recommended British American Tobacco P.l.c. 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.
Motley Fool UK 2023