Here’s how I’d invest £20,000 in a Stocks and Shares ISA for dividend income in 2023

I am looking for new passive income ideas this year. With an annual allowance of £20,000 to take advantage of, I think buying high-yielding dividend stocks in a Stocks and Shares ISA could be a great way to double your income.

Currently, the tax-free dividend allowance is £2,000. However, this will be reduced to £1,000 for 2023/24 and reduced to just £500 from 2024/25.

Optimizing your portfolio to maximize returns has never been more important in the context of UK tax changes. So here’s how I use my £20k allowance.

My dividend income target

I like to be ambitious but realistic when setting investment goals.

At FTSE 100 the index currently yields 3.55%. I think I can beat the index by picking high dividend UK stocks. With £20,000 to invest, I want to earn £1,000 in annual passive income. That means I need 5% yield from my portfolio.

I will buy some dividend stocks in my ISA to diversify my portfolio across different companies and sectors. If there is a single cut or dividend delay, hopefully you can rely on other positions to continue to provide a regular passive income stream.

Here are a few examples I’ve come up with.

Share prices of the FTSE 100

Among the FTSE 100 stocks, National Grid (LSE: NG.) Shares could be a good fit for my portfolio given their 5% dividend yield.

National Grid is a dividend aristocrat, with a 25-year history of dividend increases. The utility giant is one of the most reliable dividend stocks. I believe National Grid is no exception.

The latest financial results for the first half of 2022 are promising. Underlying earnings per share increased 42% to 32.4p. Additionally, the dividend rose 3.7% to 17.84p.

Of course, these stocks are not without risk. The company is undertaking an expensive capital investment program to decarbonise the UK’s energy grid. This could reduce the money available for dividends and possibly weigh on National Grid’s share price.

However, I like their solid dividend history and strong financials. If I had the money, I would invest it today.

Share prices of the FTSE 250

Turn to FTSE 250manufacture of clay bricks and construction materials Ibstock (LSE:IBST) also offers a 5% yield.

The UK housing crisis has been well documented and much ink has been spilled over the need to build more homes. As the leading brick maker in England, the company should benefit from this acute demand.

In a recent trading update, the business confirmed that it will increase profits by 25% to £510m for 2022, with adjusted EBITDA ahead of previous expectations.

Ibstock faces headwinds from a cooling housing market as well as increased raw material and labor costs due to inflationary pressures.

However, despite the risks, I like the long-term outlook for Ibstock’s share price. With some cash I’d buy it today.

Using a Stocks and Shares ISA

With tax changes in the offing, I’m looking to use up my £20k ISA allowance this year.

To maximize passive income, I will reinvest dividends to benefit from the compounding effect over the long term. With a clear savings plan and a disciplined investment strategy, I think I can achieve my £1,000 annual dividend income target.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content in this article is provided for informational purposes only. It is not intended to be, nor is it, any form of tax advice. Readers are responsible for doing their due diligence and seeking professional advice before making any investment decisions.