Here’s how I’d use a £20K Stocks and Shares ISA to target a 7% dividend yield

As February nears its end, we are just weeks away from the annual contribution deadline for ISAs. So I’ve been thinking about what moves I should make in my own Stocks and Shares ISA.

If I had £20,000 to invest over the coming weeks, this is how I would try and aim for an average dividend yield of 7%. That can earn you £1,400 a year.

Key investment principles

That 7% is a high dividend yield compared to the average, but I think it can be done even when investing in blue-chip companies.

However, I will stick to some important risk management principles when investing.

One of them is diversification. Others don’t allow their dogs to wag their tails. So, instead of hunting for companies based on high yields, I will look for good trading businesses with attractive share prices. Only then will I consider your income.

Going for income

But what kind of blue-chip companies with high dividend yields and solid-looking businesses do I think can continue to support their payouts?

Often found in mature industries with limited growth prospects. Tobacco is an example. FTSE 100 company British American Tobacco and Imperial brand yields of 6.9% and 6.8%, respectively. I can also own US companies in my Stocks and Shares ISA. Now I’m thinking about adding to my American holdings Marlboro the owner apart. It has 8% yield.

Another area of ​​search is an industry that is not in vogue with investors. For example, fund managers seem to fit that description. Abrdn currently yielding 7%, ahead of tomorrow’s final results. However, it has cut its dividend before, and I see a risk that could happen again if business performance weakens. No dividends are guaranteed.

Targeting large businesses

Doing this, I will create a list of stocks. With £20,000, I can diversify by dividing the money evenly across five to 10 stocks.

I will definitely spread my investment among different business sectors. While many financial services companies are currently producing good results, it may be because the City thinks there are dividend cuts ahead. I think the same is true of the housing sector at the moment.

As long as the Savings and Shares ISA are not too much concentrated in one area, I can limit the risk I face if the sector has a big downturn.

I think a 7% return is doable in today’s market. As an average result, I don’t need all the shares in my ISA to deliver 7%. Some may be cheaper, but offset by higher yields.

Whatever choice I make, the important thing is that I will not buy a stock just because of the result. I will hunt for great business at an attractive price. Hopefully taking that approach will help you avoid pitfalls.