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Several blue-chip UK stocks have some pretty juicy returns at the moment.
As an investor, I like to keep my portfolio diversified. But I think for a £20k stocks and shares ISA, spreading the money across a handful of carefully researched and chosen blue-chip stocks could give me the diversification I want.
Here are the five stocks I would choose.
British American Tobacco
My first choice would be a long-term high performance one: British American Tobacco (LSE: BATS).
Why is the stock a high yielder (9.9%, to be specific)?
The answer is a combination of decades of annual dividend increases, combined with a falling share price. Over the last five years, this UK share has fallen by 19%.
That reflects a very real risk: declining cigarette consumption in many markets. Smoking fewer cigarettes could lead to lower income and profits.
Still, the cigarette business remains substantial, despite being in decline. British American has a portfolio of premium brands such as Stroke of luck I think it can help you generate business beyond the cigarette format. Its cash generation remains formidable.
Financial services
There are many financial services companies with high single-digit percentage returns that I would happily own in my ISA.
However, I would not want to concentrate my holdings too much in a single sector, so I would buy only two of them: M&G and Legal and general.
I believe both companies will benefit from strong demand for financial services in the long term. Thanks to their respective brands and customer bases, they should be able to continue to thrive. That could help both UK stocks.
One risk I see is a market slowdown. That could lead clients of both companies to withdraw funds, hurting profits.
Legal & General has a yield of 8.7%, while M&G offers 10%.
Investment confidence
I would also put some of my ISA into City of London Investment Trust. As an investment fund, it gives me exposure to dozens of large companies, mostly British.
If the fund manager makes bad decisions, the stock price could fall. In fact, it has fallen 1% in the last five years, while the FTSE 100 has risen 11%.
However, I am attracted to its 4.9% yield.
Main street name
My fifth choice ISA for passive income has a similar return of 5%: sainsbury.
Food demand should remain high even as price pressure risks profit margins falling. Sainsbury has a significant online business, in addition to its traditional supermarket network.
Let the income flow
I think that range of UK shares would give me the right mix of passive income potential and diversification.
The average yield is 7.7%.
Therefore, investing £20,000 in shares today would allow me to generate around £1,540 in annual dividend income. This equates to almost £30 a week.
