Dividend taxes have been steadily increasing in the UK. They’re set to rise further from April 2026 for basic- and higher-rate taxpayers, too, meaning it’s more important than ever for most of us to protect ourselves from HMRC.

With a £20,000 ISA, every single penny that drops down in dividends is the investor’s to keep. Want to know how to target an annual passive income of £1,500 a year with one?

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.

Targeting a second income

A £1.5k second income from a £20k ISA would require a 7.5% dividend yield. Rallying share prices have reduced the number of dividend stocks offering yields at this level. But there are still plenty for UK investors to choose from today.

My research puts the number of income shares with yields of 7.5% or above at roughly 100. It’s possible a lot of these won’t deliver the dividends analysts are tipping. However, with some careful research, investors can separate the wheat from the chaff and make dependable income streams.

Iinvestors can give themselves an added layer of protection by building a diversified shares portfolio. This can ensure a steady flow of income even if individual companies experience operational issues that affect payouts.

Seven of the best

Here’s a mini portfolio of seven stocks with an average forward dividend yield of 7.5%. As I say, dividends are never guaranteed, but I think this selection could deliver a strong second income in 2026 and beyond:

• Legal & General – 8.5% yield
• Supermarket Income REIT – 7.4% yield
• US Solar Fund – 7.8% yield
• TBC Bank – 6.1% yield
• Admiral – 7.5% yield
• Taylor Wimpey – 8.4% yield
• iShares UK Property ETF (LSE:IUKP) – 4.3% yield

This dividend portfolio spans a multiple industries and regions, helping investors to manage risk. The trump card from a diversification perspective is the iShares UK Property ETF. It might be the lowest yielder among this group, but it’s a true passive income powerhouse.

In total, this iShares product holds shares in 31 real estate investment trusts (REITs). These span different segments of the property market like offices, data centres, warehouses, shopping centres, and residential property. As such, the fund can deliver a steady income across the economic cycle.

On top of this, this exchange-traded fund’s (ETF) focus on REITs provides an added bonus. Under the rules of these trusts, at least 90% of annual rental profits need to be paid out in dividends. By imposing a minimum threshold, regulators limit the amount of discretion the company has over what it chooses to pay, providing added dividend visibility for investors.

Of course dividends can still underwhelm if occupancy and rent collection issues spring up that hurt earnings. But with large tenant bases and clients tied into multi-year contracts, these risks are greatly reduced (if not quite eliminated). I think a portfolio comprising these seven dividend stocks could deliver a robust second income over time.

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No, that’s not my approach at all. When I have the opportunity to invest up to £20,000 tax-free in the stock market, I want to plan as soon as I can. And for the coming year, I have my eyes on some property-related investments.

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.

Investors just starting out this year should really look for diversification in their first picks and probably not concentrate on any specific sector. But I’m happy with my current selection, so I think I’m fine to focus a bit.

Why property? Inflation has just blipped up. But the general trend is down, and I can see mortgages getting cheaper in the next year or two. And when inflation falls, retail and other purchasing stands a good chance of getting a boost too. So, commercial real estate investment trusts (REITs), those are what I’m turning my eye towards.

Buy the biggest?

I like the look of the UK’s biggest, Segro (LSE: SGRO), which invests in shopping centres, warehouses, and other industrial and logistics properties. By REIT rules, it has to distribute at least 90% of its taxable income as dividends. And I like that, with a forecast 4.1% dividend yield on the cards.

Segro is also involved in partnerships and joint ventures with others. And that helps rake in extra management fees on top of its own rental incomes. And speaking of rents, in October’s Q3 update the trust reported a 94.3% occupancy rate with “continuing strong like-for-like net rental income growth“.

Segro is moving into data centres too, to capitalise on growing AI demand. I fear that might turn out to be a bit double-edged though, and any slowdown in the AI bandwagon could hurt the stock. But I’m still hoping for some share price growth on top of the dividends.

Buy them all?

To provide a boost to the much-needed Stocks and Shares ISA diversification, I’m also checking out the iShares UK Property UCITS ETF (LSE: IUKP). It’s about the closest thing we have to a REIT index tracker, spreading its shareholders’ cash across a range of individual REITs.

It actually includes some Segro. But Land Securities, LondonMetric Property, and Primary Health Properties are among the 30 or so individual trusts it holds. I like the look of all three of those. They all made my first-pass shortlist for these current ISA considerations.

The expected dividend yield is lower at 3.4% — and dividends are never guaranteed. It’s also open to sharing the risk of any one of its holdings having a bad year.

But as a way to get into real estate investing, especially for Stocks and Shares ISA newcomers, I definitely think it’s a strong one to consider. The broad diversification alone makes iShares UK Property attractive to me.

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We can, of course, choose individual stocks to buy instead. However, buying a fund can significantly reduce much of the hassle that comes with choosing specific stocks to buy. It can also be far more cost effective, typically protecting investors from higher trading fees along with Stamp Duty.

My own strategy involves holding both individual companies and ETFs in my portfolio. And I’m thinking about buying some more funds for it in 2026. Here are two that have caught my attention and I see as worth considering.

A pick for growth shares…

Technology shares are likely to remain among the best growth performers over the next decade. Themes like artificial intelligence (AI), quantum computing, robotics and self-driving vehicles could make investors a lot of cash, in my view.

The Invesco S&P World Information Technology ESG ETF (LSE:WTEG) looks extremely attractive in this respect. It holds shares in 75 different global stocks, including market leaders like Nvidia, Apple and Microsoft.

Unlike many sector ETFs, though, it focuses on companies with high environmental, social and governance (ESG) scores. This lets it harness the mammoth growth potential of tech stocks in a way that safeguards investors from companies that may face regulatory, reputational or litigation problems.

The fund’s focus on a cyclical sector may leave it vulnerable to underperformance during any economic downturn. But I’m optimistic it will deliver titanic returns as the digital revolution rolls on. Over the last year, the fund’s delivered an average annual return of 16.8%.

…and one for dividend stocks

Real estate investment trusts (REITs) can be great ways to target a second income. For this reason, holding a collection of them in an ETF can be a good strategy. One such fund I’m considering right now is the iShares UK Property UCITS ETF (LSE:IUKP), which has shares in 32 different REITs.

Under sector rules, like its fellow popular dividend picks, it must pay at least 90% of annual rental profits by way of dividends.

This is in exchange for tax benefits, like exemption from corporation tax on qualifying rental income. As such, REITs can generally provide better dividend visibility than most other stocks. Total protection isn’t guaranteed, however — after all, earnings (and by extension dividends) remain vulnerable to shocks like a sharp drop in occupancy levels.

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.

This particular REIT’s major holdings include FTSE 100-listed Segro, and FTSE 250 trusts Tritax Big Box and Primary Health Properties. This ETF’s delivered an excellent 10% return over the past 12 months, which I expect to improve looking ahead as interest rates drop, boosting REITs’ asset values and reducing their borrowing costs.

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Here are three that are worth exploring further.

UK property income

Let’s start with the iShares UK Property ETF (LSE:IUKP), which holds 33 UK real estate investment trusts (REITs). These include LondonMetric Property (logistics and retail warehousing), Primary Health Properties (GP surgeries and health centres), Unite (student accommodation), and Big Yellow (self-storage).

This sector remains out of favour due to higher interest rates. Rising borrowing costs restrict portfolio expansion plans, while investors can now find attractive yields in perceived safer havens like government bonds.

The fact that this ETF is concentrated on one sector makes it higher risk. Were the UK property market to enter a prolonged slump, this product would carry on underperforming (it’s already down 20% in five years).

On the plus side, though, investors are being offered a 4.5% dividend yield while they wait for a potential recovery. This should materialise as interest rates slowly but surely come down over the next couple of years.

Many [UK REITs] are trading at significant discounts to their net asset value, offering investors the chance to acquire real estate below its true value.

Kenneth MacKenzie, CEO of Target Healthcare REIT

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.

Asia Pacific dividends

To diversify an income stream away from UK property, an investor might also look at the Schroder Oriental Income Fund (LSE:SOI). This FTSE 250 investment trust offers broad exposure to dividend-paying companies across the Asia Pacific region.

What I like here is the trust offers a healthy level of geographic diversification. Mainland China accounts for just over 18% of assets, with the bulk of the rest made up of Taiwan, Australia, South Korea, Hong Kong, Singapore, and India.

Holdings include Samsung Electronics and Singapore Telecommunications, as well as DBS Group (Singapore’s largest bank). But it does have an outsized position in Taiwan Semiconductor Manufacturing. Any weakness in the Taiwanese chipmaking giant’s share price could negatively affect performance.

The rest of the ETF looks well-diversified, though. And over the next decade, I expect institutional investors to start allocating more capital outside the S&P 500. Asia should be a natural beneficiary of this — it’s worth noting that the trust has returned more than 20% year to date.

Finally, while Schroder Oriental Income Fund is trading at a record high, it still carries a decent 3.7% trailing dividend yield.

Cybersecurity trend

Finishing with more of a growth angle, we have the iShares Digital Security ETF (LSE:LOCK). This one holds 111 stocks across cybersecurity, including leading players like Arista Networks, MongoDB, Datadog, and Cloudflare.

As we’ve seen recently with high-profile hacks at Jaguar Land Rover and Marks and Spencer, beefing up cybersecurity is becoming a key operational necessity. And this spending is sure to be benefitting many of the ETF’s top holdings.

One risk I would highlight here is valuation. The average trailing price-to-earnings multiple of the ETF’s holdings is around 30. Were tech stocks to tumble, this would hit the fund.

However, to my mind, the cybersecurity trend just has so much further to run, especially as AI rapidly develops. I think investors should consider getting some portfolio exposure.

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Higher stamp duty, lost tax relief on mortgage interest, and heftier administration fees are all eating into landlord earnings. Larger home loan costs after the Bank of England hiked lending rates have also had an impact.

On the plus side, interest rates are tipped to fall steadily over the next year as inflation falls. But I still believe there are better ways for property investors to source a passive income.

If I had £20k to invest, here’s how I’d do it.

The landlord

Grainger‘s (LSE:GRI) the largest listed residential landlord in the country. It has more than 11,000 homes in its portfolio, and another 5,000-plus at various stages of development.

This is a much better way to play the residential property market, in my opinion. It’s much more cost effective than buy-to-let, and individuals don’t have to worry about the huge up-front costs of buying a second home.

What’s more, Grainger’s large-and-growing property portfolio helps investors to spread risk. Returns aren’t hammered if one or two tenants don’t pay the rent, or properties are unoccupied.

In fact, rents at the FTSE 250 company remain extremely low and almost all its homes tenanted. Occupancy stood at an impressive 97.7% as of March.

On the other hand, buy-to-let provides people with more control over their investment. I can choose which property/properties to buy, who to rent to, and how much to raise rents by, for instance. Grainger also faces the problem of rising costs.

But, on balance, I think Grainger brings more benefits than drawbacks to investors. And with a forward price-to-earnings growth (PEG) ratio of 0.7, it looks dirt cheap.

The ETF

iShares UK Property UCITS ETF‘s (LSE:IUKP) an exchange-traded fund (ETF) that invests in a wide range of property companies. Today, it owns shares in 40 different real estate businesses.

As a consequence, this financial instrument also offers excellent diversification across a huge selection of properties. In fact, it offers a big advantage over buy-to-let in that it has exposure to many different property sectors, not just residential rentals.

This also provides the company with added growth potential in places that I wouldn’t have the financial clout to invest in by myself. Major holdings here include warehouse specialist Segro, student accommodation provider Unite, and retail and office space owner Land Securities.

One final advantage is that the fund invests primarily in real estate investment trusts (REITs), which in turn can make it an effective buy for regular dividends. These businesses must pay out at least 90% of earnings from their rental operations in the form of dividends.

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.

One concern I have is the fund’s exposure to cyclical sectors like retail and leisure. This can affect returns during economic downturns. But, like Grainger, I think that overall this is an attractive way to make money from UK property.

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• Dividends from shares are a source of passive income
• Property is considered as a safe long-term asset class
• Potential safety from diversification can help offset a lower yield

One of my favourite strategies for passive income is to buy dividend-paying shares. However, rather than pick and choose individual stocks, I’ve always been a fan of exchange traded funds (ETFs). These allow me to invest in multiple companies by just holding one share and are usually low cost. There are lots of choices of funds available, but here’s one of my ‘must-have’ passive income ETFs for 2022.

A property ETF

Many investors consider property as one of the safest long-term asset classes. Though I might be wrong, in the turbulent times at present, I think property with its stable income streams and potential for capital appreciation is more important than ever. Although there are various ways to get exposure to property, for my own portfolio a real estate ETF is high on the priority list.

The fund I’ve been looking at is iShares UK Property UCITS ETF GBP DIST (LSE: IUKP). This dividend-paying ETF aims to provide diversified exposure to UK real estate by tracking the FTSE EPRA/Nareit UK Index. The index is designed to track the performance of property companies and real estate investment trusts (REITs) listed on the London Stock Exchange.

It’s a decent size, with over £600m in assets, has a relatively low ongoing charge, and has been going since 2007.

The ETF is also well-diversified, holding the 40 firms listed in the index. These operate in a wide variety of sectors including industrial, residential, and healthcare property.

Out of the 40 companies, the largest holding is Segro at just over 20%. This specialises in out-of-town business space and is one of the biggest industrial property companies in Europe. Real estate giants such as Land Securities Group and British Land are also in the fund, as is the largest UK operator of purpose-built student housing, The Unite Group.

A dividend-yield I can work with

One of the main drawbacks to iShares UK Property UCITS ETF GBP DIST is the relatively low dividend of 1.96%. I know that if I carefully pick and choose some companies in the FTSE 100 I might be able to get a better yield, however, for my own portfolio, this passive income is good enough.

This is because the fund is so well diversified. It means that if any individual company or sector has a weak period, it should not mean the game over for the entire ETF. In essence, I’m giving up the chance of a higher return for owning multiple companies through a single share.

In truth, this fund is unlikely to make me rich. However, it promises to give me long-term returns from what I hope is a stable asset class. For that reason, it’s a ‘must-have’ passive income pick for my own portfolio for 2022.

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• Buy-to-let property can offer both rental income and capital appreciation
• A real estate ETF can provide access to different sectors of the property market
• Both investments have pros and cons, but there can be room for both assets in a portfolio
  

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Many investors consider property as one of the safest investments over the long term. Investing in property, such as buy-to-let, certainly seems attractive.

Real estate can provide stable revenue flows through rental income as well as the potential for capital appreciation. However, it’s not all plain sailing. Mortgages, maintenance costs, and other expenses can all chip away at the return.

A property ETF 

Another option I’ve been considering is a real estate ETF (exchange-traded fund). ETFs are funds that track an index or sector and can be bought and sold like a share through most online brokers. 

The one I’ve been looking at is iShares UK Property UCITS ETF GBP DIST (LSE: IUKP). This ETF aims to provide diversified exposure to UK real estate by tracking the FTSE EPRA/Nareit UK Index. The index is designed to track the performance of real estate companies and real estate investment trusts (REITs) listed on the London Stock Exchange. 

It’s a decent size, with over £600m in assets, has a relatively low ongoing charge, and has been going since 2007. No wonder it’s one of the most popular ETFs for UK investors.

The fund is also well-diversified, holding the 40 companies listed in the index. These operate in a wide variety of sectors including industrial, residential, and healthcare. 

Out of the 40 firms, the largest holding is Segro at just over 20%. This specialises in out-of-town business space and is one of the biggest industrial property companies in Europe. Well-known names such as Land Securities Group and British Land are also in the fund, as is the largest UK operator of purpose-built student housing, The Unite Group. 

The current dividend is 1.96% and perhaps this is the biggest drawback of the fund. UK residential buy-to-let returns currently sit much higher in the region of 5%. Additionally, over 10 years, the average house price has increased by over 40% whereas this ETF has increased by around 10%. Over this period, by my calculations, an investment into bricks and mortar would have been more profitable.

Is buy-to-let better?

Despite this, there are three reasons why I’m still interested. First, UK house prices have had a fantastic price increase over the last 10 years, but there’s no reason to think that this will last forever. Second, there are 40 companies in the fund from a wide variety of property areas. Not only does this offer me more diversification than a buy-to-let, but some of these sectors have very high barrier to entry costs, which can be difficult to overcome as an individual investor. Finally, since I can buy and sell this ETF like a share, it provides access to UK property investment in a liquid way.

On balance, I think there’s room in my portfolio for both buy-to-let property and this ETF. Therefore, I’m going to seriously consider adding iShares UK Property UCITS ETF GBP DIST to my holdings.

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Mortgages and other expenses can eat away at the rental return, then there is the hassle that goes with owning a rental property. I don’t want to spend my spare time fixing broken toilets or chasing tenants for payments. Of course, I can outsource this to a managing agent, but it all chips away at the return.

However, there could be another way.

A property ETF

I’ve always been a fan of ETFs (exchange-traded funds) and have recently been thinking about ETFs as an alternative means of property investment. ETFs are funds that track an index or sector and can be bought and sold like a share through most online brokers. A property ETF could provide me with some, if not all, of the benefits of owning property myself without the hassle that goes with it.

In this case, I’ve been looking into iShares UK Property UCITS ETF GBP DIST (LSE: IUKP). This ETF aims to provide diversified exposure to UK real estate by tracking the FTSE EPRA/Nareit UK Index, with the index itself designed to track the performance of real estate companies and REITS listed on the London Stock Exchange.

I was drawn to this ETF for its good fundamentals. It’s a decent size with over £600m in assets, it has a relatively low ongoing charge, it has been going since 2007, and pays a dividend (the current dividend yield being 1.96%).

The fund is well-diversified as it holds the 40 companies listed in the index which operate in a wide variety of sectors including industrial, residential, and healthcare.

Out of the 40 companies, the largest holding at just over 20% is Segro. This is one of the largest industrial property companies in Europe and specialises in out-of-town business space. Familiar names such as Land Securities Group and British Land are also included in the fund, as is the largest UK operator of purpose-built student housing, The Unite Group.

Should I invest?

I am not sure.

Although I like the idea of property as an investment, I am already invested in a way. I own and live in a house in the UK and therefore can benefit from appreciation in house prices that way.

Also, I would plan to hold this ETF for a few years and in this case, the five-year return is more important to me. Over the last five years, the ETF has only increased by around 10%. True, it would have been paying a dividend during this time, but compared to other ETFs, this total return is just not that attractive.

For other investors, this ETF might make a lot of sense and indeed, it remains one of the most popular ETFs. It is well-diversified and allows investment in a variety of UK property sectors in a liquid way, but I don’t think this is for me right now and I will keep looking for other opportunities.

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