I like the passive income potential of investing in dividend shares. If I wanted to invest my Stocks and Shares ISA right now to target an average dividend yield of 7%, here is how I would do it. If I had £20,000 in the ISA, an average 7% dividend yield should put me in line to receive £1,400 of dividends each year.
Planning principles
No dividend is ever guaranteed, so I would spread my money across a variety of shares and industries. That way, if one of the companies reduces or cancels its dividend, the overall impact on my passive income would be limited.
With £20,000, I think putting £2,500 into each of eight shares could offer me the diversification I want. Here are the eight shares I would purchase for my Stocks and Shares ISA.
Financial services
Insurer Direct Line has an 8.7% yield. It recently raised its dividend, reflecting the health of its business. The economics of insurance attract me: demand is robust and underwriters know from long experience what prices they can charge to make a profit. However, unexpected events can sometimes hurt profits, like paying out for a very bad storm.
I would also buy investment manager M&G for my Stocks and Shares ISA. It also raised its most recent dividend, albeit just a little, and now yields 8.5%. Competition could hurt profit margins but I see the company’s well-established brand and large customer base as future profit drivers.
Tobacco
Smoking is declining in popularity. While that could hurt future profits, for now tobacco remains highly cash generative. That can support big dividends. I would buy both Imperial Brands and British American Tobacco, which offer yields of 8.2% and 6.4% respectively.
As well as cigarettes, both companies are developing businesses based on other tobacco formats. Their premium brands give them pricing power.
Consumer goods
I also expect demand for consumer goods such as detergent and shampoo to remain robust. So I would buy the maker Unilever as well as leading retailer Tesco for my Stocks and Shares ISA.
Unilever yields 4.1%. A 14% fall in the Unilever share price over the past year highlights some of the challenges the company faces, such as cost inflation. But I think its premium brand portfolio can help it protect profit margins by boosting selling prices. I like its global reach.
By contrast, Tesco has scaled down its overseas ambitions and is focussed on its core UK market. Its leading position gives it a competitive advantage. Profit margins are under pressure from discounters like Aldi, but Tesco has long experience battling price competition.
Phone home!
I would also buy housebuilder Persimmon. Its juicy 10.5% yield is among the highest of any FTSE 100 member. A housing downturn could hurt profits but Persimmon has an attractive business model focussed on high margins.
Finally I would buy telecoms giant Vodafone for its 5.8% yield. Its debt pile could eat into profits but with its market leading position in many countries, I think the company can ring up big profits.
7% yield for my Stocks and Shares ISA
Spreading £20,000 equally across those eight UK dividend shares, I would achieve an average yield of 7%. That should hopefully earn me the weekly equivalent of around £27 in passive income.