Recent market turbulence has thrown up some interesting investment opportunities. Take my Stocks and Shares ISA, for example. If I put £20,000 into it today and invested in dividend shares, I think I might be able to set up some tidy passive income streams for the future. Thanks to the price of some shares tumbling lately, their dividend yields have increased.
I would not buy a share just for its yield. But if I think it is a quality business selling at an attractive share price, a higher yield than it previously had sounds good to me!
Take Direct Line as an example. Its share price has tumbled 38% over the past year. That means its yield is now over 12%. By investing in shares like Direct Line, here is how I could target £2,000 in annual dividend income right now.
Separating short-term risks and long-term prospects
There is a reason Direct Line shares have fallen so much. Its pre-tax profit in the first half tumbled by 31%. It ended the period with 9% fewer policies in force than at the beginning. Risks such as cost inflation making claims settlement more costly pose a further risk to profits.
All of these risks strike me as concerning. But I see them as essentially short- and medium-term bumps in the road for the motor and general insurer. In the long term, I think the business should be able to benefit from ongoing demand for insurance and its strong brand.
Looking at things with a long-term investing mindset, l think Direct Line could fit well in my ISA and would be happy to buy its shares today if I had spare money to invest.
Finding dividend shares to buy
Achieving £2,000 a year in dividend income would require me to invest my £20,000 in shares with an average dividend yield of 10%.
But that is only an average. To reduce my risk, I would diversify the Stocks and Shares ISA across five to 10 different investments in equal amounts. So if I bought Direct Line with its yield of over 12%, for example, I could buy other shares yielding less than 10% and still hit my average yield target.
That would open up the opportunity of investing in shares such as British American Tobacco with its 6.6% yield, rival Imperial Brands offering 8.6%, Vodafone on 7.4% and Legal & General on 8.7%.
Double-digit yielders
But I could also buy shares yielding more than 10% thanks to share price falls.
For example, I currently own stock of asset manager abrdn. Vowels are not the only thing the company has lost – its share price is 47% less than a year ago.
That means they now yield a juicy 10.9%. Like Direct Line, a share price fall of that magnitude suggests the company faces risks. A stuttering economy could lead to investors withdrawing funds, hurting revenues and profits. But I also see long-term opportunities thanks to abrdn’s established customer base and deep experience.
By building a basket of quality businesses in my Stocks and Shares ISA at bargain prices, I really believe I could try to set up an annual dividend income of £2,000.