£20k invested in a Stocks and Shares ISA on 7 April could pay this much income
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I London Stock Exchange is a mecca for cash-strapped investors, with many quality stocks offering generous dividends. And with most falling recently because of the Middle East conflict, equity gains are higher now than they were last month.
Easter Monday (6 April) marks the start of the new ISA year, with a new £20,000 tax-free income coming in. So the first day of trading will be on Tuesday (April 7).
But what level of income is offered to someone who wants to invest the full £20k in one go? Let’s take a closer look.
Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Passive investing
Some investors understandably don’t want the hassle of picking individual stocks. Instead, they invest in index tracker funds, which is equivalent to holding the entire market.
This is a strong strategy for some people. As John ‘Jack’ Bogle, the father of passive investing, once advised: “Don’t look for a needle in a haystack. Just buy a haystack“.
Investors who bought the UK equivalent of the haystack – the FTSE 100 – on April 7 last year they did very well. During this period, the blue-chip index rose by almost 30%, with gains on top.
Currently the FTSE 100 yield is 3.2%. So an investor parks £20k in something like this Vanguard FTSE 100 UCITS ETF I am hoping to get around £640 back from income.
Of course, dividend yields are never set in stone. Some Footsie companies may reduce their payouts if the global economy does not change.
Turning to FTSE 250where returns haven’t been that strong over the past 12 months, the yield rises to 3.6%. So the income here could be slightly higher (£720 or so), assuming the UK economy is not suffering from the protracted Iran war.
Active investing
Alternatively, an investor may take on more risk by researching individual stocks that offer an above-average dividend yield. And there are plenty of those about all over London today.
For example, the portfolio below yields 7.14%, so it would generate around £1,428 from £20,000 divided equally between five stocks. This is based on their respective yields, which may not be the same going forward (yields may go up and down).
| Explanation | Express | The main danger | |
| Legal & General | Insurance | 9% | The UK recession |
| Basic Health Structures | REIT | 8% | Interest rates are high |
| HICL Infrastructure (LSE:HICL) | Investment Trust | 7.1% | Interest rates are high |
| TBC Bank | Bank of Georgia | 6.1% | Georgia’s economic downturn |
| British American cigars | Tobacco | 5.5% | A decrease in the price of cigarettes |
Infrastructure revenue
Zooming in on HICL Infrastructure, this looks like an attractive FTSE 250 stock. After falling 24% in three years, the yield has risen to 7.1%.
Infrastructure funds are sensitive to changes in interest rates. So if the Bank of England raises rates, the share price may come under more pressure.
However, operationally, the trust is doing well, with management once again confident of paying its dividend target of 8.35p for the year ending today (31 March). And 8.5p next year. This gives a yield of 7.1% and 7.2%.
HICL has recently divested its stake in the A63 Motorway in France, its second largest at 8.4%. It’s encouraging that this sold at a premium of 21% until your last count in September.
Yesterday, HICL announced that it will increase its stake in Cross London Trains for approximately £52m. It expects this to add more than 1p to its net asset value (NAV) per share on completion.
I think HICL, which trades at a hefty 24% discount to NAV, is worth checking out for high-yielding earnings.
