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Filling a Stocks and Shares ISA with dividend shares is a fabulous way to earn tax-free passive income. Investors with £20,000 to stash away could realistically aim for over £2,500 in annual cash payments from their portfolios.
To achieve this target, an investor would need a 12.58% dividend yield from their ISA. That’s well above the FTSE 100 average (3.65%) and FTSE 250 average (3.72%) so achieving it is uncertain and comes with big risks.
Only a select few high-yield stocks could deliver the goods. Fortunately, some lesser-known UK shares offer mammoth dividends. Here are two with powerful passive income potential if things go right.
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Ashmore Group
At 128p per share, value-focused asset manager Ashmore Group (LSE:ASHM) is currently trading near lows not seen since the 2008 financial crisis.
This could be a wonderful opportunity for passive income seekers to chew over. A rock-bottom share price has elevated the FTSE 250 stock’s dividend yield to a remarkable 13.11%.
Ashmore Group primarily invests in emerging markets. This involves greater risks than investments in first-world economies.
Political instability and volatile currency exchange rates are necessary evils for investors to confront. On the flip side, many developing countries have younger populations, higher growth potential, and attractive stock market valuations.
Fixed-income investments, like sovereign and corporate debt, comprise the lion’s share of Ashmore Group’s portfolio. Encouragingly, a weakening US dollar brought on by President Trump’s erratic trade policies could positively impact the performance of these assets because interest payments become more affordable.
That said, the stock’s dividend cover of 0.5 times forecast earnings is very low, indicating the gigantic yield may not be sustainable. I’m also worried by net client outflows of $3.9bn in the third quarter, which has contributed to fragility in the Ashmore Group share price.
Nonetheless, this stock offers diversification for investors who are heavily exposed to US shares. Plus, the enormous dividend (although risky) is tantalising for those who prioritise passive income.
NextEnergy Solar Fund
Staying within the FTSE 250’s ranks, NextEnergy Solar Fund (LSE:NESF) sports a chunky 12.05% yield. An investment split evenly between these two shares would deliver that coveted 12.58% yield.
As the name implies, this renewable energy company invests in solar assets and battery storage. The UK government’s ambitious goal to triple Britain’s solar power capacity by 2030 suggests a bright outlook for the NextEnergy Solar Fund share price.
Then again, a £338m debt burden is concerning. Measured against a £401m market cap, that figure looks uncomfortably high to me. It’s worth monitoring the balance sheet in case those liabilities start to spiral out of control.
On a more positive note, the majority of the fund’s long-term cash flows come from inflation-linked government subsidies, providing shareholders with a nice degree of certainty. Moreover, the stock’s steep 31.7% discount to the net asset value (NAV) should pique the interest of value-conscious investors.
Finally, a 10-year history of consistent dividend growth might soothe the concerns of those who view a double-digit yield with understandable scepticism.
Final thoughts
Investing a £20k ISA in just two high-yield stocks is very risky. Dividends are never guaranteed. I’d want my passive income portfolio to be spread across a broader range of companies.
Nevertheless, I think this pair of FTSE 250 shares deserves consideration as part of a diversified mix.
