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A Stocks and Shares ISA is a smart way to invest in UK companies for high and growing passive income in retirement.
I think it is possible to target a 7% yield. FTSE 100 shares, without taking unnecessary risks. If I increased my ISA allowance of £20,000, that would give me an income of £1,400 a year. Here's how I try to hit that target.
The first thing to say is that dividends are not guaranteed. Companies have to make enough money to pay for themselves, year after year.
A small income dream
On the other hand, if I choose the right company, I can look forward to a secondary income that increases over time, as the company's directors reward loyal investors with gradually increasing shareholder payouts.
I wouldn't just go for high yield on the FTSE 100. I'd like it to be sustainable, too. Telecoms giant Vodafone Group it currently has a trailing yield of 10.27%. But that is misleading, because the dividend will be cut in half from next March.
So I would focus on companies with a healthy balance sheet, consistent profitability, and enough loyal customers to generate future revenue.
HSBC Holdings share price (LSE: HSBA) is a good example. It has been making a fortune recently, with profits for the full year 2023 jumping 78% to $30.3bn. Even better, the board is determined for shareholders to benefit from its success. It paid a dividend of 60 US cents per share in 2023, the highest since just before the 2008 financial crisis.
As if that wasn't enough, it also ramped up its share buybacks totaling a whopping $7 billion. It was followed by another $5bn in the first half of 2024. There's more to come.
HSBC is the FTSE 100 champion
Today, HSBC shares have a trailing yield of 7%. That drives me. Even better, payouts comfortably cover 1.9 times earnings.
The yield is actually forecast to reach 9.4% higher next year, covered 1.6 times by earnings. That's good for me.
Otherwise, HSBC shares look cheap, trading at 7.6 times earnings. No stock is without risk. HSBC has a strong focus on Asia, and could benefit as China's economy continues to struggle.
If trade wars between China and the West worsen, or turn into a different kind of war, HSBC could be forced to choose sides. I can eliminate risks like these by investing in a spread of twelve stocks, over time. I would also like to hold off for 5 to 10 years, and preferably longer, to overcome the temporary instability.
Right now, I see a lot of UK green chips with similar high yields, including insurance Legal and General Group (9.07%), wealth manager IM&G (9.14%), and British American cigars (8.13%).
If I invest my money in all stocks like these, I think I can reach my target yield of 7%. Or even hit it. If I reinvest the whole amount, with luck I'll get an income of over £1,400 in the second year, and even more the year after that. It may go up all the time until I'm ready to draw it in retirement.
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