Here's how to invest £20k in a Stocks and Shares ISA with an 8% dividend yield.

A Stocks and Shares ISA is a fantastic tool for earning tax-free income. These special types of accounts have their limitations. But once the money starts working within an ISA, any capital gains and dividends earned are free from hungry HMRC.

Moreover, even after enjoying a small rally this year, there are still plenty of undervalued stocks trading at discounts. That means investors have a rare opportunity to lock in some high payouts.

In fact, creating a portfolio that yields 8% without taking too much risk is now very easy. So let's check how we do it.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

It's a matter of high yield

Building a portfolio that produces 8% returns right now is not difficult. Investors can simply use a screening tool to find high-yielding stocks and diversify into these companies. However, while that would unlock an 8% yield today, there's a good chance it won't last.

Don't forget that yields are driven by dividends and stock prices. When the latter falls, the yield rises. And often the cause of the decline is related to poor business performance. In turn, that often translates into dividend cuts.

So if you want to build an 8% ISA, the investor's focus should be on sustainability and growth, not yield. This may even require investing in businesses that offer significantly less than 8%. But if chosen wisely, these companies can increase shareholder payouts over time, eventually delivering on the 8% target, or even surpassing it.

Big budget winner in the UK

There are a few impressive dividend records among the UK's leading stocks. However, most pale in comparison to the results Safestore (LSE:SAFE) has benefited.

Over the past fifteen years, this stock has offered investors an average return of 3.3%. That's less than FTSE 100Historical yield of 4%. However, by taking advantage of the growth of the storage market, management has been able to significantly increase cash flow. As a result, the 2023 dividend reached 30.1p per share. That means investors who have stuck around all this time are now reaping a 21.5% yield – and counting.

As the largest self-storage operator in the UK, Safestore comfortably dominates in terms of local market share. That is why managers have started to expand in Europe looking for new growth opportunities in the Benelux area.

However, I think it is unlikely that investors will see another 550% increase in payouts over the next 15 years. After all, interest rates are now very high, making growth more challenging and more expensive. But that doesn't mean there aren't other profit-enhancing businesses waiting to be discovered.

So, when I set out to build an 8% Dividends and Dividends ISA, I would focus my efforts on investing in high-quality stocks with the potential to grow dividends each year rather than hunting for high yields today.