How I’d invest £20,000 in a Stocks and Shares ISA to target £1,500 of dividends annually

Now is a worrying time when it comes to inflation. With the cost of living growing faster than it has for years, additional income would come in very handy right now. That is why I have been thinking about how I could use my Stocks and Shares ISA to boost the dividend income I currently receive.

If I had a spare £20,000 in an ISA at the moment and wanted to target annual dividend income of £1,500, this is how I would go about it.

Invest for the long term

I take a long-term view of investing and that informs the approach I adopt for my Stocks and Shares ISA. I do not want to invest in a share that offers an incredible dividend yield today only to discover in a year or two that it is unsustainable.

Dividends are never guaranteed, so there is always some risk that a company may cut its payout. So I look for firms with a business model that seems both resilient and defensible. For example, if the company will likely benefit from ongoing customer demand and has a competitive advantage, that could help it keep making profits to fund a dividend.

An example is Games Workshop. I think demand for gaming will remain fairly strong no matter what happens to the economy in future. I reckon the firm’s unique line-up of products — including some for which it owns the intellectual property rights – sets it apart from rivals.

Targeting £1,500 in annual dividend income

Still, to earn £1,500 annually now from a £20,000 portfolio of dividend shares, I would need to invest in stocks with an average yield of 7.5%. A share like Games Workshop may appeal to me, but its dividend yield at the moment is 3.5%. I think that is decent, but it is less than half the average I am looking for.

But remember that 7.5% is the average yield I am looking for. So I could invest in some dividend shares with a lower yield, as long as I balanced them out with shares offering a higher yield. In my Stocks and Shares ISA, I currently own companies such as M&G and Abrdn. Both yield over 9% at the moment.

By balancing my portfolio, I could try to hit my target average yield. I would also get the benefit of diversification. So if my optimism is misplaced and Games Workshop saw its profits falling due to a recession, for example, then the impact would be limited to just one part of my portfolio.

Building dividend income using my Stocks and Shares ISA

The approach may sound straightforward enough – but putting it into practice can be a challenge. It is often tempting to chase yield. It can also be tempting to invest immediately, even if I cannot find shares that match the criteria I laid out above.

That is why I would try to be disciplined. I would hunt for shares in high quality companies first, and only consider their dividend yield after that. I would also be willing to wait. That £20,000 should not burn a hole in my pocket. I could put it in my Stocks and Shares ISA today but invest it only when I find dividend shares I think are well-matched to my objective.

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