Image source: Getty Images
I am looking for new passive income ideas this year. With an annual allocation of £20,000 to draw on, I think buying high-yield dividend shares within a stocks and shares ISA could be a great way to earn a second income.
Currently, the tax-free dividend allocation is £2,000. However, this will be halved to £1,000 for 2023/24 and further reduced to just £500 from 2024/25.
Optimizing my portfolio to maximize my returns has never been more important in the context of UK tax changes. So this is how I would use my £20k allowance.
My dividend income target
I like to be ambitious but realistic when setting investment goals.
He FTSE 100 index currently yields 3.55%. I think I can outperform the index by carefully selecting high yielding UK dividend stocks. With £20,000 to invest, I’d aim for £1,000 in annual passive income. That means I would need a 5% return on my portfolio.
I would buy a range of dividend stocks in my ISA so that my portfolio is diversified across different companies and sectors. If any individual holding company cuts or suspends its dividend, I hope I can rely on my other holdings to continue to provide regular passive income streams.
Here are a couple of examples I’m considering.
A FTSE 100 dividend share
Among the FTSE 100 stocks, National Network (LSE:NG.) The stock could be a good fit for my portfolio given its 5% dividend yield.
National Grid is a dividend aristocrat, with a 25-year track record of dividend increases. The utility giants are traditionally some of the most reliable dividend stocks. I think National Grid is no exception.
The latest financial results for the semester of 2022 were promising. Underlying earnings per share rose 42% to 32.4 pence. In addition, the dividend grew 3.7% to 17.84p.
Of course, the action is not without risk. The company is undertaking a costly capital investment program to decarbonise the UK power grid. This could reduce the money available for dividends and possibly influence National Grid’s share price.
However, I like the strong dividend history and strong financials. If I had some extra money, I would invest today.
A FTSE 250 dividend share
going back to the FTSE 250manufacturer of clay bricks and building materials ibstock (LSE:IBST) is also offering a 5% yield.
The UK housing crisis is well documented and much ink has been spilled on the need to build more housing. As the UK’s leading brick manufacturer, the company should benefit from this strong demand.
In a recent business update, the company confirmed it expects revenue to rise 25% to £510m by 2022, with adjusted EBITDA above previous expectations.
Ibstock is also facing headwinds from a cooling housing market, as well as rising raw material and labor costs due to inflationary pressures.
However, despite the risks, I like the long-term outlook on Ibstock’s share price. With some extra money, I would buy today.
Using a Stocks and Shares ISA
With future tax changes in mind, I am striving to use as much of my £20,000 ISA allowance as possible this year.
To maximize my passive income, I would reinvest my dividends to benefit from a long-term compounding effect. With a clear savings plan and a disciplined investment strategy, I believe I could reach my target annual dividend income of £1,000.
Please note that tax treatment depends on each client’s individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and obtaining professional advice before making any investment decisions.
