How I’d target a stunning 7% dividend yield from a £20k Stocks and Shares ISA

A Stocks and Shares ISA is a brilliant way to invest in UK companies to build a high and rising passive income stream for my retirement.

I think it’s possible to target a 7% yield from FTSE 100 shares, without taking undue risks. If I maxed out my £20,000 ISA allowance, that would give me income of £1,400 a year. Here’s how I try to hit that target.

The first thing to say is that dividends are never guaranteed. Companies have to generate enough cash to pay them, year after year.

Passive income dream

On the other hand, if I pick the right company, I can look forward to earning a second income that rises over time, as company directors reward loyal investors by steadily increasing shareholders payouts.

I wouldn’t just go for the biggest yield on the FTSE 100. I’d want it to be sustainable, too. Telecoms giant Vodafone Group currently has a trailing yield of 10.27%. But that’s misleading, because the dividend will be cut in half from next March.

So I’d focus on companies with a tidy balance sheet, steady profits, and enough loyal customers to generate revenues well into the future.

HSBC Holdings (LSE: HSBA) is a good example. It’s been making a fortune lately, with full-year 2023 profits jumping 78% to $30.3bn. Better still, the board is keen 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 financial crisis struck in 2008.

As if that wasn’t enough, it also lavished them with share buybacks totalling a whopping $7bn. It followed that another $5bn in the first half of 2024. There’s more to come.

HSBC is a FTSE 100 hero

Today, HSBC’s shares have a trailing yield of exactly 7%. That’s bang on target for me. Better still, payouts are comfortably covered 1.9 times earnings.

The yield is actually forecast to hit a whopping 9.4% over the next year, covered 1.6 times by earnings. That’s good enough for me.

Despite that, HSBC shares look cheap, trading to 7.6 times earnings. No stock is without risk, though. HSBC is heavily focused on Asia, and could take a hit as the Chinese 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 pick sides. I’d offset risks like these by investing in a spread of a dozen shares, over time. I’d also aim to hold them for a minimum 5 to 10 years, and ideally longer, to overcome short-term volatility.

Right now, I can see plenty of UK blue chips with similarly high yields, including insurer Legal & General Group (9.07%), wealth manager M&G (9.14%), and British American Tobacco (8.13%).

My investing my money across stocks like these, I reckon I can hit my 7% target yield. Or even beat it. If I reinvest every penny, with luck I’ll get more income than £1,400 in year two, and even more the year after that. It could potentially rise all the time until I’m ready to draw it in retirement.