How To Invest £20k In A Stocks And Shares Isa To Target A 7% Dividend Yield

Few wealth-building tools come close to matching the power of a Stocks and Shares ISA. That’s because every pound of capital gains and dividends earned inside one is entirely tax-free, letting the compounding process work its magic without HMRC interrupting along the way.

And with the London Stock Exchange home to so many high-yielding opportunities, it’s possible to earn as much as 7% from dividends alone with the right shares. But which ones actually fit the bill?

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.

A 7.3% yield hiding in plain sight

Legal & General (LSE:LGEN) currently offers a chunky 7.25% dividend yield, and it’s currently the highest in the entire FTSE 100 today. That means a full £20,000 ISA allowance invested solely in this stock would unlock around £1,450 in annual passive income overnight, entirely tax-free when held inside a Stocks and Shares ISA.

But is this actually a business worth trusting with that kind of allocation? Or is the yield too good to be true?

How the dividend keeps growing

Legal & General has spent the last couple of years simplifying itself, shedding legacy complexity to focus squarely on three core engines:

1. Pension risk transfer.
2. Asset management.
3. Workplace pensions.

That focus is now paying off. In 2025, core operating profit climbed 6% to £1,623m and, crucially, the growth wasn’t scattered evenly, it was concentrated in areas the company deliberately doubled down on.

Pension risk transfer volumes hit £11.8bn, with around 80% of UK deals transacted through the group’s own long-standing asset management clients â a clever trick that lets Legal & General capture fees on both sides of the same transaction.

Workplace pension assets also grew 21% to £114bn, partly because 15% more workplace members are now choosing to convert their pension into an L&G annuity when they retire, feeding customers straight back into the group’s most profitable division.

Put together, these overlapping revenue streams translated into a welcome 9% boost to core earnings per share, supporting an evermore generous dividend yield. But can it last?

What could derail this?

The obvious risk is competition. The pension risk transfer market has become one of the most crowded corners of UK insurance, with rivals aggressively chasing the same defined benefit schemes. Price undercutting between insurance groups and financial institutions has already started to creep in, with margins on new deals starting to compress â a trend that’s likely to continue.

At the same time, the Asset Management segment is also still mid-transition. Management describes the division as being “at an inflexion point,” which is encouraging. But inflexion points can just as easily disappoint if repositioning efforts stall or private markets flows slow from their current 32% growth pace.

Worth building an ISA around?

None of these risks is trivial, but they’re the kind of manageable, well-understood challenges that come with dominating a genuinely growing market rather than signs of a business in decline.

With a freshly-announced £1.2bn buyback (its largest ever), and more than £5bn earmarked for shareholder returns through 2027, Legal & General looks like exactly the sort of income share worth mulling for an income-generating Stocks and Shares ISA. And it’s not the only stock that’s caught my eye this weekâ¦

Should you invest £5,000 in Legal & General Group Plc right now?

When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Legal & General Group Plc made the list?

Zaven Boyrazian does not hold any positions in the companies mentioned.

The post How to invest £20k in a Stocks and Shares ISA to target a 7% dividend yield appeared first on The Twelfth Magpie.

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