Looking to boost my dividend income, I think buying shares in my Stocks and Shares ISA could be one way to go. If I had a spare £10,000 to invest in my Stocks and Shares ISA at the moment, I reckon I could target annual dividend income of £500. Here is how.
Buying a basket of high-quality companies
Dividends are never guaranteed and even the best run business can run into unexpected difficulties. That could hurt my dividend income. To reduce such risks to my portfolio, I would invest in a variety of companies and industries.
I would also stick to what I regard as high-quality companies. By that I mean companies with a strong position in an industry that should keep seeing robust demand. That strong position is not just about market share. Rather, I would go for companies with a competitive advantage unique to them, such as a strong brand, proprietary ingredient, or unique distribution network.
I would split the £10,000 in my Stocks and Shares ISA evenly, putting £2,000 into shares of each of five companies.
Choosing the right companies
So what five shares would I buy now for my Stocks and Shares ISA? My first choice would be the popular income share National Grid.
A lot of investors like the relatively stable and consistent cash flows of utilities. With its power distribution assets, National Grid benefits from those economics. The company does face risks – a distribution network can be expensive to maintain, leading capital expenditure costs to hurt profits. But cash flows are usually strong and the company’s yield of 4.2% attracts me.
Another company that can face high network expenditure costs is telecoms giant Vodafone. But I like the assets the company puts to use in earning money. Namely, its strong brand, large customer base and network infrastructure. The company has a lot of debt but, hopefully, large cash flows will help service it. They can also fund dividends – Vodafone yields 6.4%.
I would invest in two consumer products manufacturers, Dove maker Unilever and Lucky Strikes owner British American Tobacco. They yield 4% and 6.6% respectively. Both face challenges like inflation threatening profit margins. British American also risks ongoing decline in the cigarette market. But the companies have a lot going for them in iconic brands, global reach and economies of scale. I own them both in my Stocks and Shares ISA and would happily buy more.
My fifth investment would be in Lloyds. The banking group has a highly profitable business and a dividend yield of 4.7%. Will that continue? One risk I see is a worsening economy pushing up loan defaults and hurting profits. But the dividend is amply covered. The company’s range of brands, including Halifax and Bank of Scotland, give it a strong market position.
Using my ISA to generate passive income
Putting £10,000 into these five shares, I would be on target to generate a bit more than £500 of passive income in the form of dividends over the coming year.
No dividend is ever guaranteed. But I have tried to take a prudent approach to managing my risks here and focussed on businesses I think could continue to make meaty profits in future. Hopefully, that could set me up for years of dividends yet to come.