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A £20k Stocks and Shares ISA can deliver a whole heap of passive income when invested in a spread of high-yield shares.
There’s no shortage of solid income payers on the FTSE 100. It’s my go-to place when hunting for dividends.
Let’s say an investor tucked this year’s £20,000 ISA allowance into five different companies, putting £4,000 into each.
I’ve picked out five of my favourite FTSE 100 dividend stocks, across five different sectors. All have different trailing dividend yields – as well as risk and reward profiles – but combined, offer a pretty stunning rate of income.
| Company | Sector | Dividend yield |
| BP | Energy | 6.01% |
| British American Tobacco | Tobacco | 7.77% |
| HSBC | Banking | 5.82% |
| Land Securities Group | Property | 6.75% |
| M&G | Investment management | 9.27% |
All these are at the higher end of the dividend yield scale, notably investment manager M&G, with it staggering 9.27% income stream.
Big dividends
It’s important to say at this point that dividends are never guaranteed, and higher ones can be more vulnerable to being cut or cancelled. Yet, I think these five look reasonably solid.
In fact, with luck, they could potentially increase their shareholder payouts, year after year, giving a rising income. As ever, their share prices may be volatile.
Take HSBC Holdings (LSE: HSBA). A few months ago, it was right in the firing line of Donald Trump’s tariff blitz. Today, it’s one of the biggest winners following news of a shock US-China trade deal.
The HSBC share price has climbed 17% over the last month and now stands 25% higher over one year. Dividends are on top of that.
HSBC has been buying back shares, which often signals management confidence. The board recently signalled another $3bn share buyback in Q1.
HSBC shares trade on a modest price-to-earnings ratio of just 9.3 times. That looks cheap to me, given the size and quality of the business.
It still faces challenges though. Falling interest rates could further squeeze the bank’s net interest income, which dropped from $8.7bn to $8.3bn in the first quarter.
HSBC has major exposure to China, whose economy is struggling even without the tariff threat.
Yet better-than-expected Q1 profits of $9.5bn suggests it remains in strong shape. I think it worth considering buying for income and long-term growth. But like everything today, volatility should be expected.
Power of compounding
The five stocks I’ve picked have an average trailing yield of 7.12% a year. On a £20,000 ISA, that translates to £1,424 a year in tax-free income.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
That’s just in year one. If the investor left that to compound and grow for 25 years, their £20k would roll up to £111,633.
That’s a slightly daft figure for two reasons. First it assumes the dividend yield stays the same, which it won’t. Second, it doesn’t include any share price growth whatsoever.
Just 3% average annual growth on top of that would turn £20,000 into £222,681, assuming all dividends invested. A 7.12% yield would then deliver income of £15,855 a year. Impressive, from an initial £20k stake.
Build wealth over time
A Stocks and Shares ISA invested in high-yield shares can be a powerful tool but it’s not a get-rich-quick scheme. But it’s well worth exploring for those looking to generate long-term gains and build a reliable passive income stream.
