With the Stocks and Shares ISA deadline fast approaching, British investors are searching for the best ways to take advantage of their £20,000 annual allowance. And for those seeking to build a second income, dividend shares may be the best way to allocate capital. That’s especially true, considering today’s cheap valuations offer a wide range of high-yielding opportunities.
With that in mind, let’s take a look at how to make a £20,000 ISA generate £1,500 in annual passive income.
Exploring high-yield opportunities
To hit a goal of £1,500 with one year’s worth of ISA allowance, an investment portfolio would need to provide a dividend yield of 7.5%. That’s a pretty chunky payout. But looking at the FTSE 350, there are around 30 companies today that are seemingly meeting this threshold.
The FTSE 250’s Diversified Energy Company is currently in the lead with a whopping 29.3% dividend yield! And in the FTSE 100, Vodafone is leading the charge at 10.8%. Providing these payouts are maintained, investors could quickly lock in a passive income significantly ahead of £1,500. However, high yields can often be a sign of caution.
Diversified Energy is currently being investigated by regulators for potential environmental breaches, and Vodafone has a serious debt problem. In both cases, investors may be faced with a dividend cut that could compromise both their passive income as well as invested capital.
In other words, bigger is not always better. But not every high-yield opportunity may turn out to be a dud. After all, there are always exceptions. And Foresight Solar Fund (LSE:FSFL) might be one.
Solar opportunities
The UK has a reputation for having relatively poor weather largely consisting of wind and rain. However, despite popular belief, it also gets its fair share of sunshine. So much so that just under 10% of the National Grid is powered by solar farms, many of which are either outright or partially owned by Foresight.
The group passively generates green electricity to power homes and businesses across the country. This has proven to be a highly cash-generative enterprise that’s provided a steady stream of dividends to investors. In fact, shareholder payouts have been hiked nine years in a row on the back of rising electrical demand.
The firm is also expanding internationally in Spain and Australia, as well as diversifying its asset portfolio into energy storage solutions. As such, Foresight increasingly seems to have promising long-term potential, especially as climate change concerns continue to mount.
Pairing all this with an 8.2% yield, investors could more than exceed their target of £1,500. However, like any business, there are risks to consider.
Foresight is by no means the only solar energy company out there. And even if it was, the group is at the mercy of the weather which is becoming increasingly erratic worldwide. This exposes the bottom line to some lumpiness that could cause temporary disruptions to dividends.
Therefore, simply throwing all £20,000 into this single business isn’t likely the most prudent approach. While risk can’t be avoided, it can be mitigated through tactics like diversification. By owning a wider range of quality, high-yield businesses, the impact of one being disrupted can be offset by the continued success of others.
This post was originally published on Motley Fool
