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The London Stock Exchange is a mecca for passive income investors, with loads of quality shares offering generous dividends. And with most taking a tumble lately due to the Middle East conflict, dividend yields are higher now than a month ago.
Easter Monday (6 April) marks the start of the new ISA year, when a fresh £20,000 tax-free allowance kicks in. So the first trading day will be Tuesday (7 April).
But what level of passive income is on offer for someone looking to invest the full £20k at once? Let’s take a closer look.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Passive investing
Some investors understandably don’t want the hassle of picking individual stocks. Instead, they invest in index tracker funds, which is the equivalent of holding the entire market.
This is a solid strategy for certain people. As John ‘Jack’ Bogle, the father of passive investing, once advised: “Don’t look for the needle in the haystack. Just buy the haystack“.
Investors who bought the UK’s equivalent of a haystack — the FTSE 100 — on 7 April last year have done very well. Over this period, the blue-chip index is up around 30%, with dividends on top.
Currently the FTSE 100 yield is 3.2%. So an investor parking £20k in something like the Vanguard FTSE 100 UCITS ETF would hope to get around £640 back in passive income.
Of course, dividend yields are never set in stone. Some Footsie firms could cut their payouts if the global economy nosedives.
Turning to the FTSE 250, where the returns haven’t been as strong in the past 12 months, the yield rises to 3.6%. So the income here could be a bit higher (£720 or so), assuming the UK economy isn’t battered by a prolonged Iran war.
Active investing
Alternatively, an investor could take on more risk by researching individual shares that offer above-average dividend yields. And there are plenty of those about across London today.
For example, the portfolio below yields 7.14%, and would therefore generate around £1,428 from £20,000 split evenly between the five stocks. This is based on their trailing yields, which might not be the same moving forward (dividends might go down as well as up).
Description Yield Key riskLegal & General Insurance 9%UK economic downturnPrimary Health PropertiesREIT 8%Higher interest ratesHICL Infrastructure (LSE:HICL)Investment trust7.1%Higher interest ratesTBC BankGeorgian bank 6.1%Georgia economic downturnBritish American TobaccoTobacco 5.5%Falling cigarette volumes
Infrastructure income
Zooming in on HICL Infrastructure, this looks quite an attractive FTSE 250 stock. After tumbling 24% in three years, the yield has risen to 7.1%.
Infrastructure funds are sensitive to interest rate changes. So if the Bank of England hikes rates, the share price might come under further pressure.
Operationally, however, the trust is doing well, with management reiterating confidence in paying its dividend target of 8.35p for the year ending today (31 March). And 8.5p for the forthcoming year. This gives yields of 7.1% and 7.2%.
HICL recently disposed of its stake in the A63 Motorway in France, its second-largest portfolio asset at 8.4%. Encouragingly, this was sold at a 21% premium to its last calculated valuation in September.
Then yesterday, HICL announced it was upping its stake in Cross London Trains by around £52m. It expects this to add more than 1p to net asset value (NAV) per share upon completion.
I think HICL, which is trading at a massive 24% discount to NAV, is worth checking out for high-yield income.
