Image source: Getty Images
The base interest rate in the UK is 3.75%. The FTSE 100 average dividend yield is 2.94%. So when deciding how to allocate money, some might decide to steer clear of using a Stocks and Shares ISA and stick to a high-yield savings account. However, there are plenty of stocks that could yield much more annually. Let’s dig in.
Being an active investor
An ISA has an annual subscription limit of £20k. However, this is still plenty to feel a noticeable difference in yield pickup from either holding cash or using an index tracker. One immediate benefit is that dividends received from an ISA aren’t subject to tax. As a result, the investor can receive the total gross dividend amount without losing any, effectively boosting the net portfolio yield.
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.
The next factor is based on active stock picking. After all, there are currently 28 stocks yielding 7% or more in the FTSE 100 or FTSE 250. This means that I’d be confident in picking a diversified selection of companies from this mix, enabling the overall yield of the ISA to be 7% or higher.
It’s true that some of the shares in this mix have double-digit yields that do look quite risky. However, there’s enough for an investor to avoid clear outliers that don’t look sustainable. Further, by including a dozen or so in the ISA, even if one company does cut the dividend in the future, the overall impact is limited.
If someone can invest £1,666 each month to fully take advantage of the £20k limit, it can quickly compound. In year five, the income alone could work out to be £621 a month. Of course, some might not be able to afford to invest that much. That’s fine. The main point is that using an ISA for any amount can be more tax-efficient, along with an active stock selection strategy.
A defensive pick
One stock that could be considered is HICL Infrastructure (LSE:HICL). The stock is up 7% in the last year, with a current divdiend yield of 7.06%.
HICL generates cash primarily from its infrastructure assets. These are mostly structured via long-term contracts with public sector counterparties. As a result, it provides the business with fairly predictable, growing income streams over time, which is good for dividends.
Importantly, the company doesn’t try to stretch the income payments too thin. For example, the dividend cover ratio is 1.1, which means the current earnings per share can fully cover the dividend.
Another reason to like the stock is that, despite the current geopolitical uncertainty, core infrastructure is a defensive area. Essential services like healthcare facilities and transport are less cyclical (and exposed) than broader equities. In my view, this should give income-oriented investors comfort.
In terms of risks, the stock has traded well above the net asset value (NAV) of the portfolio for several years. From the last report, it was almost a 25% discount. This could indicate that investors don’t have a lot of optimism around the company.
Overall, I think it’s a good stock for investors to consider to try and help hit the 7% annual target.
This story originally appeared on Motley Fool
