A blended dividend yield of 5.5% on an £18,182 ISA would translate to £1,000 a year in passive income, free of tax. That’s a meaningful sum of money, and diversifying across a few big FTSE 100 dividend stocks could hit that target yield.
I’ve looked at a few of the big dividend payers to find a combination that works. Here’s how the maths works out.
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.
Crunching the numbers
There’s more than one way to combine three stocks to land on a 5.5% blended yield — it depends entirely on how you weight each one. Here’s one combination that works, using NatWest (LSE: NWG), BP, and Legal & General:
- NatWest: £8,182 invested at a 5.1% yield
- BP: £7,273 invested at a 5.1% yield
- Legal & General: £2,727 invested at a 7.7% yield
- Total: £18,182 invested, generating £1,000 a year
Blend those three together and the overall portfolio dividend yield works out at 5.5%. That’s £1,000 in annual income coming from NatWest (£418), BP (£372), and Legal & General (£210).
That target yield is comfortably ahead of the FTSE 100’s average yield of around 3.5%. So why did I look at these stocks specifically, and which one would I currently pick for income?
Where I’m focusing my attention
These are three of the biggest dividend-paying names in the Footsie, but I’m wary of investing based just on a headline figure.
Legal & General offers the highest yield of the three at 7.7%, but operates in the competitive pension risk transfer market, which could impact future payouts.
BP has been a beneficiary of higher oil prices but tensions in the Middle East and the recent 60-day memorandum of understanding (MoU) introduce real uncertainty. A durable resolution in the Middle East could be the catalyst to review not just BP but many other shares in the months ahead.
That leaves NatWest. Of the three, I think it’s the one that I’m watching the closest as a potential investment right now.
Following years of balance sheet repair after the financial crisis, the company has boosted profitability, and management has been increasingly generous in returning surplus capital through dividends and buybacks.
The current payout looks well supported by earnings, and the price-to-earnings (P/E) ratio of just 9.1 still looks undemanding relative to the broader market. It’s also cheaper than peers like Barclays (11.6) and Lloyds (13.8).
That said, there are some big risks and I’m not buying the shares just yet.
As a predominantly domestic lender, the company is exposed to the UK economy in a way its more internationally diversified peers are not.
Loan impairments could rise sharply if unemployment climbs, and falling interest rates that can help borrowers can also hurt net interest margins that drive profitability.
Building a resilient portfolio
This kind of blended approach to portfolio construction works well for me and my investment goals. I find it’s a sensible way to target a solid income from an ISA without depending too heavily on any single business.
I’d want to dig further into each company’s payout cover and balance sheet strength before committing real money, but as a starting framework, building a diversified portfolio that can deliver a resilient yield is a strong starting point.
Should you invest £5,000 in NatWest Group Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if NatWest Group Plc made the list?
Ken Hall does not hold any positions in the companies mentioned.
