With a 7% yield, £15,000 in dividend shares would deliver £1,400 of passive income a year. Mark Hartley looks at one UK share that fits the bill.

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Mark Hartley

Published 18 August

POLN

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When targeting passive income, dividend shares are your friend. The regular payouts from the stocks drip feed cash into your account while you sleep.

If you invest with a Stock and Shares ISA, you can maximise returns. UK residents can invest up to £20,000 a year in an ISA without having to pay any tax on the dividends.

Over 10-20 years, those savings make a huge difference due to the magic of compounding.

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.

But are there really a lot of reliable UK stocks that pay a 7% yield? Yes — but you need to know how to identify them.

Targeting low-risk, high-yielding FTSE shares

The number one question to ask when assessing a high-yield is, why? Companies don’t set yields themselves — it’s a percentage derived from:

  • Total annual dividends (set by the company).
  • The current share price (set by the market).

The yield changes whenever the price moves (frequently) or when the dividend payout is altered (periodically). If the yield’s high because of an increase, that’s good. If it’s high because the share price tanked, not so good.

However, a dividend hike can still be risky if the company doesn’t have the cash to cover payments. Equally, if a price falls due to a temporary blip, it could be a bargain opportunity.

Long story short: picking dividend shares requires close inspection of what’s going on behind the scenes. 

One example to consider

Big market upsets are usually the result of macro factors that are unpredictable and out of our control. So I always assume a worst-case scenario and then try to identify which companies are best prepared to handle volatility.

What does that look like?

  • A healthy balance: low debt, strong cash flow.
  • A long track record of consistent dividend payouts.
  • A structural competitive advantage, or ‘moat’.
  • Earnings that sufficiently cover payouts.

Take Pollen Street Group (LSE: POLN), for example. The company provides specialist financial services in private equity and credit, which is hardly niche but it’s in demand.

It doesn’t have the moat of top dividend stocks such as RELX, Unilever or National Grid, but it does have a yield near 7%.

Net debt sits around £191.6m against £595m in equity – a debt-to-equity ratio of 0.34. That’s healthy. It’s been paying dividends for 10 uninterrupted years, and they account for only 61% of its earnings. That’s sufficient coverage.

Recent results revealed total assets under management (AUM) of around £7.1bn, with fee‑paying AUM of about £5.2bn. Critically, it enjoys high‑quality recurring fee income, which helps support a progressive dividend and regular buybacks. Together, these elements make it a strong contender as a dividend share to consider.

But like any stock, it still faces risks. For example, it’s highly susceptible to shifting markets and facing notable competition from larger rivals in the sector. If creditors lose confidence in the firm’s strategy, its fundraising could dry up, hurting profits and prompting a dividend cut.

The bottom line

No stock’s the perfect choice for a dividend portfolio. A higher yielder like Pollen Street can help increase your average income — but only in small allocations to reduce risk.

POLN current yield around 6%, if the price falls the Trust may be added to the Watch List.