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It might be over halfway through the Stocks & Shares ISA year, but this shouldn’t put new investors off. An empty ISA right now has plenty of time to be filled up to a maximum of £20k worth of stocks before the deadline next April. A key part of this portfolio could revolve around high-yield stocks with generous dividend payments.
The push for high yield
Straight off the bat, it’s true that shares with a high yield often have higher risk than some other peers. So if an investor is looking to fill an ISA with low-risk value stocks, then high yield isn’t the right play. However, if an investor wanted to target large income and was accepting of the risks, this strategy could work well.
The desire for a higher yield than normal is becoming more of a focus due to the rise in interest rates and inflation. For example, inflation is currently at 6.8%. The value of the cash I have sitting in the bank is being eroded by inflation. Given that the FTSE 100 average dividend yield is 3.81%, it does make sense for some to search for options yielding above 6.8%.
True, it’s not a perfect offset to inflation. But adding stocks that yield 6-9% in an ISA can help to stay ahead of the game. Within the ISA, a benefit is that I don’t pay dividend tax.
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.
Specific ideas to consider
Even though investors want to get the most out of their money, I’d avoid some ultra-high yielding stocks that don’t look sustainable. For example, the 16.32% yield on offer via Diversified Energy shares is so elevated because of the stock falling by 33% over the past year. I don’t think the business is in great shape so there could be a dividend cut in the future.
Rather, I like some investment funds and trusts that are publicly listed. In the renewable energy space, NextEnergy Solar Fund (8.96%) and Renewables Infrastructure Group (6.51%) are both stocks I’d include.
Even though this sector has underperformed recently, I think it’s a multi-decade theme that will provide long-term gains. This makes both perfect for ISA additions, in my view.
With market volatility fairly low, trading, and investing platforms have struggled this year. I see this changing over the next year due to likely changes in monetary and fiscal policies from major economies. So I believe now is a good time to try and lock in the high yields from these type of firms. TP ICAP (7.84%) and CMC Markets (7.34%) are two cases worth looking at, in my view.
Bringing it all together
I can’t sit here and say definitely that high-yield stocks will provide income consistently in the years to come. However, I can try and diversify this risk within the ISA by including a host of different shares. In that case, even if one option does cut the dividend, the overall impact to the portfolio will be limited.
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