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When we think of investing in a Stocks and Shares ISA for passive income, what comes to mind? Stocks paying a steady annual dividend, without year-to-year uncertainty? When we reach the stage of drawing down our income, that might make good sense.
When I get there, I expect I’ll have most of my investment in Dividend Hero investment trusts, like City of London Investment Trust and Murray Income Trust. They’ve raised their payouts for at least 50 years in a row. And they typically pay dividend yields of 4.5% to 5%.
But I’d wager most people reading this are still in the build-up phase. We’re reinvesting our annual dividends in more shares to try to maximise our eventual pot, aren’t we? If we’re at that stage, who cares how the dividends fluctuate? Long-term returns are surely all that matters.
Top sectors
I intend to keep investing in my favourite sectors, even ones that can be cyclical and volatile. Right now, I think the insurance business looks especially good. I have my eye on Aviva, Phoenix Group Holdings, and Legal & General (LSE: LGEN).
Insurance stocks can be tricky to rate on typical valuation measures, like the price-to-earnings (P/E) ratio. At Legal & General, analysts have it at 15, falling to 9.5 based on 2026 forecasts. That seems fine. But I’m more interested in liquidity measures, which can have a greater bearing on an insurance firm’s ability to pay dividends.
At the halfway stage, the company reported a solvency II coverage ratio of 223%, with a capital surplus of £897m. We saw the interim dividend raised 5%, with a forecast full-year yield of 8.8%. We also have a £200m share buyback.
Cyclical stocks are especially tricky to predict. And dividend cover by earnings has been falling for FTSE 100 stocks, which might keep investors away from some of the top yields. But for passive income investors looking forward at least a decade, I think this could be a good one to consider for pot building. It’s on my list.
Off the boil
Housebuilder stocks like Persimmon and Taylor Wimpey (LSE: TW.) have been giving up their earlier 2024 gains. Taylor Wimpey is down 30% from its 52-week high. Is this a new opportunity to buy cheaply, before the sector gets back to a long-term upwards trend?
With interest rates not coming down as quickly as hoped, I can see reasons for the dip. Taylor Wimpey has a forecast 8% dividend yield. But that depends very much on the cash coming in from house completions, and they’re falling. In a full-year update on 16 January, the company reported 9,972 UK completions, down from 10,356 in 2023. And 2023 fell behind 2022.
Until we see serious growth in these figures, I fear the Taylor Wimpey share price could remain low. But at least the firm’s order book was up to £1,995m at 31 December, from £1,772m the previous year.
And CEO Jennie Daly pointed out that completions were actually “towards the upper end of our guidance range.“
Despite possible dividend pressure in 2025, I’m seriously considering buying some to add to my housebuilder holdings.
