With the recent stock market turmoil, plenty of UK shares have seen their dividend yields rise substantially. In fact, looking at the FTSE 350, there are now over 30 leading British companies paying yields of over 7%.
And by capitalising on these opportunities within an ISA, investors can potentially establish a lucrative passive income stream for many years.
So with that in mind, let’s explore how investors should approach investing their annual ISA allowance into these income opportunities.
Maintaining a 7%+ dividend yield
There are a growing number of high-yielding enterprises across the UK’s 350 largest businesses. Sadly, building a portfolio comprising these companies isn’t likely to meet performance expectations. In fact, there’s a high chance that such a portfolio would destroy wealth rather than create it.
Don’t forget a high dividend yield is often an early warning that something is wrong. And the last thing any investor wants is to buy shares in a firm only for it to announce a cut to shareholder payouts months later.
There are currently 33 companies offering a payout greater than 7%. And chances are, many of these are going to be duds. Investors must spend time carefully evaluating each to determine whether the dividend can be sustained. Specifically, they need to try to answer the question, is the yield high because management is raising dividends, or is it because the share price is tanking on concerning outlook?
If it’s the latter, then investors should run for the hills, regardless of how tempting the income potential might be. On the other hand, a closer look may be warranted if stock prices are being dragged down by short-term pessimism.
Keep a diversified ISA
After whittling down the list of investment-worthy income stocks, investors can now spread their capital across multiple firms. However, it’s essential to ensure a variety of industries and geographies are represented. There are always unpredictable external forces that can throw a spanner in the works. And diversification is one of the best tactics to defend against wealth disruption.
That doesn’t mean settling for sub-par companies to gain exposure to certain industries. Suppose investors can’t find a high-quality enterprise among the list of high yielding dividend stocks in the FTSE 350. In that case, it may be worth exploring other income stocks offering lower payouts.
Just because a business doesn’t offer a 7% dividend yield today doesn’t mean it won’t in the future. In fact, some of the best income investments can be made by successfully identifying companies with the potential for consistent long-term expansion.
This is precisely how billionaire investor Warren Buffett collects more than a 54% dividend yield on his original investment in Coca-Cola. And while finding the next Coke is far from straightforward, adding such a wealth-building company in an ISA could reap tremendous long-term returns.