‘More than 7% income’: How savers could get £1,600 a year tax free from a £20k Isa | Personal Finance | Finance

Millions of savers are pouring money into low-risk cash Isas, which offer interest rates of up to four percent a year with minimal risk to your capital.

Others are buying actively managed investment funds and passive index trackers via their stocks and shares Isa allowance.

Another option is to create a portfolio of individual company stocks instead.

Buying direct equities is riskier but can be highly rewarding, especially for those who want to generate maximum levels of income.

Right now, the UK’s FTSE 100 blue-chip index is packed full of dividend-paying stocks with yields ranging from four percent to more than 10 percent.

Investors can also get capital growth on top of that income if their share values rise.

Better still, both the dividend income and capital growth is entirely free of tax inside an Isa.

Currently, 11 stocks on the FTSE 100 pay dividend income of seven percent a year and in some cases much more.

The highest-yielding stock on the index currently pays income of a staggering 10.93 percent.

These aren’t high-risk start-ups but household name companies, including insurers Aviva and Legal & General Group, housebuilder Barratt Developments and mobile phone provider Vodafone Group.

It’s not for everyone, but an exciting opportunity for some.

Today, investment manager Abrdn (previously called Standard Life Aberdeen), yields annual income of 7.11 percent, far more than any cash ISA or equity income investment fund.

And it’s far from alone.

There are two big cigarette manufacturers listed on the FTSE 100, Imperial Brands and British American Tobacco. They currently yield 7.45 percent and 7.56 percent a year respectively.

Global mining giant Rio Tinto yields 7.47 percent.

Aviva (7.49 percent), Taylor Wimpey (7.97 percent) and Barratt Developments (8.23 percent) also offer incredibly generous dividend yields.

Some go even further with their shareholder payouts.

Legal & General yields 8.89 percent a year, while lesser-known insurer, Phoenix Group Holdings, pays investors income of 9.25 percent a year.

But the most generous income of all comes from fund manager M&G, which used to be part of insurer Prudential.

It yields 10.93 percent a year.

Investors can buy these stocks via an online Isa platform such as AJ Bell, Bestinvest, Chelsea Financial Services, Hargreaves Lansdown or Interactive Investor.

Dvidend income is not guaranteed. During the pandemic, when the UK went into lockdown, many companies suspended their payments to save money as revenues fell.

Your capital is not protected if a share price crashes or in an extreme instance, a company goes bust.

While that rarely happens with multi-billiion pound FTSE 100 companies, it can never be completely ruled out. Especially as the banking crisis rolls on.

Yet there are ways to limit the risks.

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One is to stick to solid, established companies with loyal customers and steady, sustainable cash flows.

As a further safeguard, Isa investors should only invest money they can leave in the market for a minimum of five years, and ideally longer.

Another crucial way of limiting any potential downside is to build a balanced portfolio by investing in a spread of different stocks, operating in different sectors.

Somebody who invested this year’s full £20,000 ISA allowance in, say, half a dozen of these high yielding stocks could generate income of around eight percent a year.

That would give them income totalling £1,600 in year one. This would hopefully rise over time, as most companies aim to increase their dividends as profit grow.

Most private investors reinvest their dividends while still of working age, to help their money compound and grow.

They later start drawing them as income after they retire.

Buying individual stocks is a high-risk way to invest and only for those who know what they are doing.

It can be rewarding for those who do.